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 from 143 million in Q2 2016 to 173 million in Q2 2017. An increase of 30.5 million users or 21% year-over-year. For the quarter, DAUs was up 4.2%, adding 7.3 million users. Average Revenue Per User was $1.05. This is up 109% over Q2 2016 when ARPU was $0.50. ARPU increased 16% over Q1 2017 when ARPU was $0.90. Total revenue grew 153 percent year-over-year and up 21 percent from $149.6 million in Q1 revenue to $181.6 million.

Those numbers are fine and dandy. Snap is growing in every way an investor would like (although not at the pace the greedy would like to see). But the real story is the product evolution. Snap released 16 versions of Snapchat in Q2 compared to 6 versions of Facebook. Not only is Snap moving fast with quick releases, but some of the releases had massive features. Snap Map, a slick, fun 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 after 166 days. $SNAP IPO’d at $17 and closed down 23% from the IPO price at $13 after 166 days. The $SNAP doomsayers want to 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. $SNAP may benefit from defections. 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 “Facebook Lite” and every flavor you could imagine, 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 ARPU for yearly revenue of $4billion and profit margin of 25% to justify that valuation (that would be a PE of 16). Despite being 20X 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 results and laugh, just like we do with Facebook.


Oh Snap!

Posted: May 18th, 2017 | Author: | Filed under: Investing, Product, snapchat | No Comments »
Snap’s first earnings as a public company are in and there is a consensus! Snap’s first earnings are terrible and the company is a disaster. Or is it? Do we care about the opinions on Wall Street trying to earn a quick buck? Or click-bait journalists looking for impressions? Those investing in $SNAP must have patience, and if you do, there is a lot to be happy about in this earnings report.

Snap missed DAU and Growth Numbers!

What did Snap miss? Expectations set by bozos on Wall Street? Evan and the leadership team didn’t set guidance on revenue or DAU growth. Analysts on Wall Street made numbers up based on little precedent. Snap didn’t miss a thing.
 
Snap’s user base grew 36% yoy to 166 million. Quarter over quarter, Snap grew 5%. This is consistent with quarter-over-quarter growth from Q3 to Q4. Instagram Stories may have slowed down growth but Snap is growing at a healthy pace.

Snap missed Earnings with a whopping $2.2 billion loss!

Again, this is Wall Street expectations. $2 billion of the $2.2 billion loss was due to a one-time impact of stock compensation. I’m much more concerned with ongoing costs.
 
The flip side is Snap grew revenue yoy 286%. ARPU tripled yoy to 90 cents per user globally. North America monetization is at $1.81 a user and they’ve only scratched the surface. For comparison, Facebook is approaching $20 in ARPU. It’s encouraging to know there may be a long ways to go before we see a slowdown in ARPU growth with Snap.

Evan is selfish!

Another common theme is Evan is selfish. The $750mm bonus is evidence A. It’s quite the opposite in my book. Evan has turned down offers to sell Snap and could have been a billionaire years ago. Instead, Evan has shown an ability to delay gratification and plan for the long-term. This is why investors of Snap should be patient. Others in Evan’s shoes may resort to growth hacks to appease Wall Street. Evan keeps the big picture in mind. Evan dismisses short term thinking that doom companies in the long run.

Bottom Line

Expecting ~10% DAU growth and profitability from Snap this quarter was unreasonable. Evan is playing the long game with Snap and part of that approach is not optimizing for the short term. Snap is a product company investing money into R&D to grow and monetize. Instagram may have copied the story format but Snap is more than that. Snap is a different context to its users. Snap will morph in ways we can’t imagine. You’ll need patience if you want to buy and hold $SNAP but with that patience will come great reward.

The B2B Gold Standard

Posted: December 19th, 2015 | Author: | Filed under: Investing, Product, SaaS | No Comments »

Atlassian Logo

I can’t believe it, I’m excited for an IPO for a B2B company. Maybe the past 10 years working at B2B companies has poisoned my brain but I’m hoping it’s because Atlassian is something special. Companies like SalesForce and Workday have killed it on Wall Street but I never had any interest in throwing money at them. I like to invest in companies in which I’m intimately familiar with their product, companies that are profitable and are led by founders who care. I haven’t found a B2B business that fit those requirements but Atlassian is a different beast.

The money most SaaS companies put towards marketing & sales boggle my mind. The majority of SaaS companies spend 2x on marketing & sales compared to product & engineering. For every buck put into making the product better, these companies are spending two bucks to get the word out and convince customers to fork over the dough.

Bucking the norm for SaaS, Atlassian has been profitable since year one (Note: Atlassian isn’t a true SaaS company since they allow customers to host their software). Thirteen years in, Atlassian continues to make more than they spend. The margins aren’t anything to brag about but at least they exist and Atlassian still has the killer revenue growth people expect from SaaS companies.

I’d imagine part of the reason Atlassian has been able to turn a profit is its small marketing & sales spend. Atlassian spent 21% of its revenue on marketing & sales in the first half of 2015, 16% in 2014 and a mere 12.5% in 2013. In comparison, Box spent 200% of their revenue on marketing & sales in 2013, Salesforce spent 56% and the industry standard is around 50%.

Atlassian’s marketing & sales budget has been growing but I’m hoping they keep the course of letting the product speak for itself. My ideal B2B company does the following — build a badass product that customers enjoy, those customers spend more money with you and they tell others about how great your product is, which does the sales for itself. When you get into that cycle the money goes into making your product better which accelerates it and scales better than a heavy marketing & sales approach. After a decade of using Atlassian products like JIRA, I’m of the opinion they make best of breed products and can pull this strategy off.

I dig not only Atlassian’s product-focused philosophy but all of the other things I look for when I buy a stock. I like that their founders have shown an ability to delay gratification. Scott Farquhar and Mike Cannon-Brookes could have sold out long ago but held out, these guys are in it for the long haul. They’ve been patient in building Atlassian slowly and thoughtfully. They only took funding after they had impressive traction, which gave them the leverage they needed to get a favorable deal. The values the founders run the company on jibe with me —

  1. Open company, no bullshit.
  2. Build everything with heart and balance.
  3. Don’t f*** the customer.
  4. Play as a team.
  5. Be the change you seek.

I’m going into this stock knowing the Price to Earnings ratio is ridiculous, and that is fine. The bottom line is I think this company will be around in 10 years and will be making a lot more money than they are now. I have faith that Atlassian will continue to seek profit and their low marketing & sales spend will allow them to do so with ease. The founders will keep the culture strong and ensure a long-term outlook is maintained. The product line will continue to get better, the current Atlassian customers will continue to spend more money, the Atlassian products will continue to make their way into the browsers of employees at companies all over the world and the money will add up nicely.