Keep Calm and Snap On

Posted: August 18th, 2017 | Author: | Filed under: facebook, Investing, snapchat | No Comments »
Keep Calm and Snap On

Keep Calm and Snap On

 

Snap has released their Q2 results. If you trust the pundits, it was”another failure on a long, downward path for the social media company.” Impatient journalists and those on Wall Street seeking the quick buck aren’t happy. The buy-and-hold types have a lot to be happy about.

The Good News

  • Daily Active Users grew 21% year-over-year from 143 million in Q2 2016 to 173 million in Q2 2017. An increase of 30.5 million users. For the quarter, DAUs was up 4.2%, adding 7.3 million users.
  • Average Revenue Per User grew 109% year-over year from $050 to $1.05. ARPU increased 16% over Q1 2017 when ARPU was $0.90.
  • Total revenue grew 153% year-over-year and up 21 percent from $149.6 million in Q1 revenue to $181.6 million.

Snap is growing in every way an investor would like (although not at the pace the greedy would like to see). The real story is the product evolution. Snap released 16 versions of Snapchat in Q2 compared to Facebook’s 6 releases. Not only is Snap moving fast with quick releases but some of the releases had massive features. Snap Map, a way to see where your friends are and what is going on at specific locations, was released in Q2 and well received. There has been much written about Snap being copied but Snap moves too fast. You can’t copy their soul.

Misunderstood – $FB vs $SNAP 166 Days Post-IPO

Snap isn’t the only tech company that was underwater 166 days after their IPO (the day of this writing). $FB IPO’d at $38 and closed down 42% from the IPO price at $22. $SNAP IPO’d at $17 and closed down 23% from the IPO price at $13. The $SNAP doomsayers emphasize the risk of losing top talent when the stock temporarily underperforms. $FB was able to weather a tougher storm than $SNAP is going through. If an employee is swayed to leave by short-term stock swings they are not buying into Snap’s potential like they should. They don’t get it, just like a lot of those on the Street.

After Facebook’s first two earnings reports the Street continued to be concerned about mobile monetization. Facebook had just started their mobile monetization efforts and the rewards were inevitable. This is similar with Snap. Some want revenue to grow quicker than it is but Snap just started to monetize. This will take time.

Analysts continue to speculate on User Growth, Revenue and Profit/Loss despite lack of guidance from Snap. Snap will “miss” these numbers and the market will respond (in the short-term). This is because Wall Street doesn’t understand Snap’s User Growth will not be like Facebook’s. Snap is for the savvy, smartphone owning, high speed bandwidth users. Facebook, with web apps, mobile apps on every platform, “Facebook Lite” etc, is for everyone. Snap is unlikely to have the 1.35 billion DAUS that FB has anytime in the next decade. Snap won’t dominate the masses but it will dominate the critical 18-35 demographic for sometime.

Bottom Line

Facebook is where the puck is. Snap is where the puck is going. User Growth for Snap will continue to feel the headwinds until the rest of the world catches up with high speed bandwidth. Snap would have to compromise the product too much to appeal to the emerging markets and it’s not worth their time in the long-run. Snap’s play is to continue to evolve the most modern social media app for the young and savvy. Continue to take advantage of the latest and greatest in tech and monetize those savvy users with deep pockets.

Snap’s market cap is currently ~$16 billion. Napkin math says Snap would need to get to 200mm DAUs at $20 annual ARPU for yearly revenue of $4billion and profit margin of 25% to justify that valuation (that would be a PE of 16). Despite being 5X away from that ARPU number, those seem like a layup for Snap. Someday we’ll look back at the market’s response to these early earnings reports and laugh, just like we do with Facebook now.



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