Snapchat's User Engagement Increases Despite Assailment From Instagram Stories

To say that Snap Inc SNAP has experienced a tumultuous ride in its post-IPO life would be an understatement.

In what was arguably the most anticipated IPO of the year, shares have failed to deliver, down 40 percent since going public in March.

Snapchat’s woes are largely based on Facebook Inc FB's copy-cat model. Facebook has failed innovate in quite some time, yet has such a vast user base that it can poach features from other companies and deliver them on their platform.

On Thursday, Wedbush has announced initiated coverage on Snap with a Neutral rating and set a $12 price target on the company, nearly 20 percent lower than current trading levels.

“Decelerating growth trends, fierce competition for user mindshare and advertiser dollars, and a history of being hugely unprofitable keep us on the sidelines,” said Wedbush analyst Michael Pachter.

At just 173 million daily active users, Snapchat’s user base is well below the competition. One-year-old Instagram stories, the most comparable product to Snapchat, has amassed 250 million users.

A main driver of Pachter's concern regarding Snap was that net additions peaked in the second quarter of 2016 at 21 million. By the fourth quarter of 2016, net additions reached just 5 million.

A bright spot for Snapchat is that its usage and engagement is not eroding, according to a new report from BTIG. The proliferation of Instagram Stories has not caused Snapchat users or time spent to decrease; both have actually increased over the past two quarters.

Despite the similarities, it appears that Snapchat and Instagram stories have inherently different uses.

“The unanswered question is whether Snapchat’s revenue shortfalls have been driven by ad dollar competition from Instagram,” said BTIG analyst Rich Greenfield.

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