Deutsche Bank: Concerns about Snapchat eating Facebook's lunch are 'overblown' (FB)

There have been some suggestions in the investor community recently that Snapchat's explosive user growth and the ramping up of its advertising offering could come at the expense of Facebook.

SunTrust analyst Bob Peck pointed out in April, for example, that Snapchat's daily video views have been growing much faster than that of Facebook. In a separate note published last month, Peck said of Snapchat's augmented reality prowess: "Snapchat has tapped into an unaddressed aspect of human behavior that other platforms haven't, creating a rare opportunity in the social media / messaging app ecosystem."

Meanwhile, a recent report from The Information suggested "between 2013 and 2015, the number of photos shared on average by each Instagram user fell," citing "two people briefed on the app’s internal data." Another report from The Information in April said a drop in posts was happening on Facebook.

But in a note published Wednesday, Deutsche Bank analysts say recent concerns about declining engagement on Facebook and Instagram as users switch to Snapchat "seem overblown."

(As an aside, Deutsche Bank seems particularly fond of using the "overblown" adjective. In another note published Wednesday, the bank said recent soured investor sentiment around Google was "overblown.")

The best is yet to come

Deutsche Bank's analysts note that many investor conversations recently have centered around the question: "Is 2016 the best it's going to get for Facebook?"

Deutsche Bank says no.

It notes that every quarter, more big brands are embedding Facebook tracking pixels on their sites so they can prove whether serving ads on Facebook drove actual sales or another form of conversion like an app download or an email newsletter sign-up.

These types of products allow Facebook to capture more big brand advertiser budgets outside its mobile gaming heartland, which drives a lot of its advertising revenue.

(Mobile app install ads make up a huge proportion of Facebook's revenue base, largely because it's easier for a mobile app company to track whether an ad led to a download – plus those types of companies tend to spend almost all of their ad budgets on online direct-response ads, whereas big brand marketers place a bigger majority of their spend on traditional media like TV and billboards.)

For example, Deutsche Bank says "nearly all" online travel agents and major hotel chains are using Facebook's Dynamic Product Ads, despite the travel version of that product only coming to market in the first quarter of this year. Getty Images

Dynamic Product Ads are Facebook's answer to Google's Product Listing Ads and allow brands to showcase their product catalog in the News Feed and target those ads to users who may have already viewed that item or purchased a similar one elsewhere on the web.

Meanwhile, Deutsche Bank says lots of large marketers are experimenting with big-money campaigns on video and Instagram ads, which is helping drive Facebook's growth.

Deutsche Bank expects Facebook to post "modest upside" to the analyst consensus ad revenue estimate o $5.84 billion in its second quarter, which will be up at least 53% year-on-year. The bank tweaked its estimates slightly lower to account for the weakness of the British pound post-Brexit, but Facebook is still expected to post another monster quarter on July 27.

Facebook to start closing the gap between the 5% of consumption and 1% of ad spend across its apps

Looking to the rest of 2016 and beyond, Deutsche Bank says new products such as allowing transactions within Facebook Messenger and the big opportunity afforded by WhatsApp's huge and highly-engaged userbase remain catalysts for further growth.

With all of Facebook's products, its ability to aggregate data is key to growing its market share, according to Deutsche Bank.

The bank's analysts summarize: "Longer term, if FB can aggregate enough data, it should be in a position to take share in all stages of the purchase funnel from other ad channels, which should close the gap between FB’s 5%-7% of global consumption and 1% of ad spend across its top apps."

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