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Snap Investors Shouldn't Fear Instagram's New "Threads"

By Leo Sun – Aug 29, 2019 at 1:00PM

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An app that posts automatic status updates doesn’t sound like a Snapchat killer.

Snap's (SNAP -1.18%) stock recently fell after The Verge reported that Facebook's (META 0.79%) Instagram was developing a new companion messaging app called Threads. Threads has similar messaging features as other apps, but it automatically shares real-time updates for a user's location and traveling speed and a device's battery life to a small circle of "close friends." The status updates can also be posted manually.

Threads' core messaging platform closely resembles Instagram's own messaging service and includes a camera for capturing photos and videos. Instagram hasn't officially announced the app yet, so it could just be an experimental product.

Three women take a selfie at a party.

Image source: Getty Images.

Snap's stock often dips whenever Facebook and Instagram copy Snapchat's features or launch similar apps. However, investors should recall that Snap has weathered those assaults before -- and Threads doesn't look like much of a threat.

Snap's growth is accelerating

Snap's daily active users (DAUs) grew 7% sequentially and 8% annually to 203 million last quarter -- which marked an acceleration from previous quarters and silenced concerns about its growth.

DAU Growth

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Sequential

(2%)

(1%)

0%

2%

7%

Annual

8%

5%

0%

(1%)

8%

Source: Snap quarterly reports.

Its average revenue per user (ARPU) also rose 37% annually as its losses narrowed. Snap attributed that growth to strong demand for its automated ads, a redesign of its Android app, and the ongoing expansion of its ecosystem with new Discover content, original shows, games, and AR lenses.

Snap was also ranked as the top social network for U.S. teens with a 41% mindshare in Piper Jaffray's latest Taking Stock with Teens survey, while Instagram ranked second at 35%. Snap's ongoing growth indicates that its ecosystem is sticky and that it isn't losing too many users to Instagram.

Facebook won't kill Snapchat

Facebook consistently considers Snapchat to be a thorn in its side. It tried to buy Snap for $3 billion in 2013, approached it again in 2016 as it was gearing up for its IPO, then launched a long list of similar apps and features after it refused.

Between 2012 and 2014, Facebook launched Poke and Slingshot, two Snapchat clones that never gained any steam. In 2017, it split Instagram's messages into a separate Snapchat-like app called Direct and acquired the anonymized teen polling app TBH. Facebook killed off TBH last July and discontinued Direct earlier this year.

That dismal track record indicates that Threads could die a quick death before gaining any ground against Snapchat.

A woman takes a selfie with a smartphone.

Image source: Getty Images.

Facebook's best platform for countering Snapchat is Instagram, which has more than 500 million daily active users and a massive teen audience. That's why it eventually added ephemeral messages, video "stories," and AR filters and masks to Instagram.

Those efforts, especially Instagram Stories, initially lured away some of Snapchat's users. However, Snap's user growth over the past three quarters indicates that it's fighting back and winning back users.

Facebook shoots Instagram in the foot

In the past, Instagram's greatest strength was arguably the fact that many people didn't know that it was owned by Facebook. That split made it a popular refuge for teens as their parents spent more time on Facebook.

However, that illusion of choice is disappearing as Facebook tightens its grip on Instagram. Over the past year, Facebook has appointed its own executives to lead Instagram (following the abrupt departures of its founders) and merged its notifications and posts with Facebook's. It could also rebrand the app as "Instagram by Facebook" in the near future to address antitrust concerns.

Those moves could all alienate Facebook's younger users and send them to Snapchat. They could also prevent any Instagram-affiliated messaging app from gaining ground against Snapchat.

Focus on the facts

Facebook launches experimental apps all the time, and many of them (like its TikTok clone Lasso) are duds. Reading too much into these rapid-fire experiments generates lots of meaningless noise, so investors should focus on two key facts: Snap's business looks healthier than before, and Facebook has repeatedly failed to kill Snapchat.

Based on those facts, there's no reason that Snap's stock should have stumbled after The Verge's report. Instead, I still think it's one of the best growth stocks to own as the exhausting trade war drags on.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook and Snap Inc. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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