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Facebook’s (FB - Analyst Report) recent offer to buy Snapchat reflects the company’s desperate move to improve its user engagement particularly among teenagers. According to Bloomberg, Facebook offered approximately $3.0 billion (up from its earlier offer of $1.0 billion) for Snapchat, more than fourfold of the Instagram offer ($700.0 million) last year.

Reportedly, Snapchat rejected Facebook’s offer and stated that it would prefer to remain independent and wait for a better proposal until at least next year. According to The Wall Street Journal, Snapchat has been valued at $4.0 billion by Chinese e-commerce company Tencent Holdings, which has also shown a keen interest in the start-up.

Although Facebook’s strong cash balance will encourage it to offer a substantially higher amount, we believe that this bidding and counter-bidding is pushing up Snapchat’s value to unrealistic territories, particularly post the hugely successful initial public offering of Twitter (TWTR - Analyst Report).  

Snapchat’s mobile app helps users to send photos and videos to their friends, which last only for a few seconds. Despite processing more than 350 million snaps per day in September (up from 200 million in June), the two-year old company is yet to report any revenues.

Moreover, the company is yet to prove its business model and like most of its peers doesn’t want to depend solely on advertising revenues. Instead, the company is focusing on generating revenues from selling virtual goods and games, a model already followed by Tencent’s WeChat and the Japanese messaging app Line. Facebook also generates a small amount of revenues from selling virtual goods.

Despite these disadvantages, Facebook’s interest in Snapchat is particularly due to its growing teenage user base. Snapchat’s attraction particularly for the teens remains in the fact that it provides them privacy (since it destroys the photos and videos instead of storing) that is elusive on the Facebook platform. In 2012, the company launched a similar kind of a service called Poke, which failed miserably.

To woo teenagers, Facebook recently decided to allow users in the age group of 13 to 17 to make public posts. So far, posts made by teenagers could only be seen by their friends and "friends of friends." The company also announced that it will restrict ad quantity in newsfeed in order to improve user engagement.

In such a scenario, we believe that if Facebook succeeds in acquiring Snapchat, it will be imperative for the company to continue with the current system in order to maintain and gain users. Moreover, the acquisition will help Facebook to compete against the likes of WeChat, KakaoTalk, Line as well as messaging apps such as WhatsApp going forward.

Most recently, Facebook expanded its “contact via phone number” feature to the messenger for Apple’s (AAPL - Analyst Report) iOS. This feature is already available for Google’s Android users. The expansion of the feature, which allows Facebook users to message non-friends via phone number, will help the company to compete more effectively with WeChat and KakaoTalk.

Currently, Facebook has a Zacks Rank #2 (Buy).

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