Is This Social Media App Threatening Facebook’s Popularity?

Facebook Inc‘s (NASDAQ:FB) post impressive earnings for the second quarter of the fiscal year 2016, erased all doubts of its dominance. The company’s recorded earnings per share were (EPS) $0.97, exceeding the Street’s forecast of $0.82. Facebook’s revenue for that period reached $6.44 billion, topping the consensus estimate of $6.02 billion. The social media network’s daily active users or DAU and monthly active users or MAUs grew by 17% and 15%, respectively. Suffice it to say, Facebook is making a killing.

But despite a good year with shares jumping to nearly 19%, investors expressed muted sentiments towards Facebook. What could be the reason?

J.P. Morgan (NYSE:JPM) noted that although Facebook is exceeding the Street’s expectations, the company’s growth, engagement, and ad load remains stagnant. Another potential threat that Mark Zuckerberg should be wary of is SnapChat, a startup valued as much as $22.7 billion and one that could affect Facebook’s future revenue.

In June, Andrew Left of Citron Research said Facebook is starting to lose its relevancy and “anyone who has a teen knows you can’t discount the relevancy of Snapchat.”

Facebook executives remained unfazed by SnapChat’s mounting popularity. “We anticipate ad load on Facebook will continue to grow modestly over the next 12 months and then will be a less significant factor driving revenue growth after mid-2017,” stated Facebook CFO David Wehner during the company’s Q2 conference call back in July. “Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly.”

J.P. Morgan predicted that Facebook’s advertisement growth will slow down to 10% in the fiscal year 2016 and it will only go downhill in 2017 and 2018. However, the investment firm believes that since ad load is a moving target, its effects will grow progressively as long as the company improves its ad targeting formats and return on capital (ROI) without affecting user experience.

It’s also worth noting that Facebook has yet to tap its billions of WhatsApp and Messenger users for revenue. The social media behemoth recently monetized Instagram by posting ads, generating millions in profits.

Insiders said that Facebook’s user engagement has dropped during the last quarter in key regions: US, Canada, and Europe. But analysts believe that recent product changes, such as the launching of Instagram stories, shows that the company is on the right track in terms of boosting its DAUs and MAUs. The changes could also trigger a shift in usage and boost competition in certain demographics.

Meanwhile, SnapChat is poised to widen its global reach. According to J.P. Morgan, the company is also developing ways to boost user engagement and attract advertisers. However, the firm believes that SnapChat has a long way to go to oust Facebook or sway subscribers to switch.

That said, SnapChat is winning over users thanks to its superior targeting capabilities and data along with high-quality ad formats. The emerging platform’s popularity – SnapChat claims to have more than 100 million daily active users, most of them under 35 – is enough to rattle Facebook to a point where Instagram ripped off SnapChat’s main feature, Stories.

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