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Snap (SNAP) Discloses Investment by Tencent & Affiliates

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Recently, Snap Inc (SNAP - Free Report) , in its quarterly filings with the Securities and Exchange Commission (SEC), disclosed that Shenzhen, China-based Tencent Holding Limited and its affiliates have purchased nearly 145.8 million of “non-voting Class A common stock via open market purchases”. Tencent now holds 12% of Snap’s total outstanding shares

Snap had earlier raised $60 million in Series B funding led by Institutional Venture Partners wherein Tencent was also a participant. Moreover, it was rumored that Tencent was interested in buying out Snap in a bid to expand in the U.S. market. Facebook (FB - Free Report) also had tried to buyout Snapchat but CEO Evan Spiegel turned down the offer.

Snap earlier reported dismal third-quarter 2017 results. Decelerating growth of advertising revenues and user base sent shares plunging. Investors appear worried about the company’s long-term prospects.

Notably, shares of Snap have lost 47.3% of their value since its listing date of Mar 2, 2017 against 18.7% growth of its industry.

Decelerating Growth – Key Concern

Although revenues in the third quarter increased 62% year over year, the growth rate has come down significantly when compared with the past quarters. Reportedly, in the first and second quarters of 2017, the company’s revenues had registered 286% and 153% year-over-year increase, respectively.

The company’s daily active users (DAU) increased 17% year over year to 178 million. On a sequential basis, DAU increased a meager 2.9%, down from 4.2% increase in the second quarter and 5% in the first quarter.

Region wise, revenues from North America (78% of total revenues) grew 45.6% year over year to $162.8 while in the second quarter, revenues had increased 126% year over year. Sequentially, revenues grew 10.3% in the third quarter, compared with 15% in the second quarter.

Snap’s slowing user base and revenue growth is attributed primarily to the surging popularity of Facebook’s Instagram. Facebook not only introduced Snapchat-inspired features on Instagram but made it more popular than Snapchat. Per Piper Jaffray’s report, Snapchat doesn’t enjoy a “unique user base” as 90% of the users also use Instagram.

Therefore, in our opinion, advertisers are more likely to opt for Instagram whose Total Addressable Market (TAM) is thrice that of Snap's. Facebook and Instagram boast over 6 million and 2 million advertisers, respectively. Both platforms also have very high daily active users (Facebook has 1.37 billion DAUs and Instagram has 500 million DAUs).

We note that Snap’s international revenues grew 175% year over year to $45.2 million in third quarter compared with 9% growth in the second quarter. The company fared better sequentially as well – growing 32% in the third quarter compared with 14% growth in the second quarter.

However, owing to the Chinese government significant restrictions on social-networking activities, Snapchat along with other popular websites such as Twitter (TWTR - Free Report) , Alphabet’s (GOOGL - Free Report) YouTube and Facebook are blocked in China. Therefore, in spite of the latest investment of this Chinese company, Snapchat will not be able to reap in any benefit from the growing Internet users in China.

It remains to be seen whether the company’s initiatives to improve its service in the international markets, redesign the app and now the investment of Tencent help to drive overall user growth.

Currently, Snap carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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