In the social media industry, a company either innovates and grows — or it quickly dies.
In fact, companies in the industry are transparent about this in their SEC filings.
Take Snap Inc. (SNAP) for instance. In its IPO filing, the company indicated that its growth, and its very survival, depend on its ability to innovate.
Recently, shares of Snap have rallied 116%. So it must have figured out its innovation plan… right?
No Patent Protection!
Long before Snap went public in March 2017, I used media appearances and print articles to warn investors not to touch it.
The reason? It had no patent protection!
That’s why giants like Facebook could copy Snap’s most popular innovations with impunity.
And Facebook did copy Snap’s innovations:
It copied its “Lens” filters… its “Stories” format… its 3D face filters…. Etc.
And for Snap, this was very bad news…
It’s All About the Network
You see, to make money as a social media company, you need a huge userbase…
You need a huge network you can sell advertising to.
But with Facebook “borrowing” all of Snap’s innovations, Snap’s network wasn’t growing fast enough.
And that’s why its losses started piling up.
In fact, in the quarter before its IPO, its losses ballooned by 37%.
Look Out Below!
When we invest in IPOs, we’re investing in a company’s future growth and profits.
So when the only thing a company does is burn money, look out below…
The stock is doomed!
And sure enough, that’s precisely what happened with Snap:
Before long, the stock was down over 80% from its IPO-day high.
The Threat to the Current Rally
But investors have short memories…
That helps explain why, based on some new innovations (not patented), Snap’s stock recently rallied back to its $17 IPO price.
This makes no sense…
You see, in addition to competing with Facebook, Snap is now competing with TikTok.
This China-based app for making and sharing short videos already boasts a bigger userbase than Snap worldwide…
And in the U.S., which is Snap’s biggest market, TikTok is rapidly gaining ground. In fact, in the last year, its monthly active users nearly doubled.
Furthermore, TikTok has started “borrowing” Snap’s most popular features, just like Facebook does…
Copying a Money Maker
According to Digiday, a trade magazine for online media, TikTok is set to release a new ad format.
This format will let users create videos using “Augmented Reality” effects that are branded.
This is a direct copy of Snap’s wildly successful “Sponsored Lens” ad format.
And for TikTok and its advertisers, this promises to be a big success…
As Business Insider’s Nina Goetzen and Daniel Carnahan explained recently, TikTok’s features allow content to go viral in a way that just isn’t possible on Snapchat…
On Snapchat, content only gets spread to a user’s immediate circle. But TikTok’s “discoverability” features (like hashtags and its "For You" page) make it possible for content to spread infinitely.
Anything Snap Can Do, Facebook and TikTok Can Do Better
Anything Snap can do, Facebook and TikTok can do better.
And since there’s no patent protection to prevent this competition, Snap is doomed.
So don’t even think about buying into the current momentum in Snap shares. It won’t last.
Instead, be on the lookout for the IPO of TikTok’s parent company, ByteDance.
That’s expected sometime this year.
Ahead of the tape,