The Positive Beat

Posted: April 30th, 2018 | Author: | Filed under: apple, facebook, Investing, snapchat, writing | No Comments »

Beat reporting, also known as specialized reporting, is a genre of journalism that can be described as the craft of in-depth reporting on a particular issue, sector, organization or institution over time.

This month I’m taking a break from writing about tech to get meta. I want to write about writing.

My favorite content online is by those who have a beat. Writers with specialized knowledge on a subject. Writers with an expertise, not those summarizing a press release.

Throughout the years I’ve grown fond of M.G Siegler’s and John Gruber’s take on Apple. And Josh Constine’s take on Facebook.

There are two other commonalities about these writers that separate them from the pack. They have a distinct voice. I enjoy the way their writing sounds when I read it in my head. But perhaps more importantly, they all took a positive beat. M.G. and Gruber are known as being Apple Fanboys. Josh was able to see Facebook’s potential when many doubted them.

But, surprisingly, I find taking a positive beat rare. Even more of a bummer, M.G., Gruber and Josh are all spilling more ink on critical, negative beats. M.G. loves Amazon but hates Facebook and has grown more critical of Apple. Gruber is generally pro-Apple but detests Trump, Facebook, Guns and Google. Josh prefers to criticize Snap, and like the rest of the blogosphere, crucified Facebook over Cambridge Analytica.

After a newsletter where M.G. was bearish on the HomePod and MoviePass I wrote to him:

A lot of negativity in this one! HomePod is a flop, MoviePass won’t work out, etc.

Not that you always have to be a cheerleader but I think writing on things you are bullish about have always been your sweet spots. Back in the day you nailed the positives about Apple when the majority of your peers were pressed to write hit pieces.

I know you know this, but I think time will tell your take on the HomePod is wrong. Apple is playing the same strategy they’ve always played with devices. Go high-end, have good margins to start, don’t worry about market share. Marketshare comes with a superior product. I hope you write this down as claim chowder for yourself, if Apple shows a Watch-esque position with the voice-commanded speaker market, they pulled it off.

He replied:

I try not to think of things as negative vs. positive, I care far more about being proven right in the end! And yes, we’ll see how HomePod does — especially after the first price cut and launch of SiriKit at WWDC!

+1. Being right is more important than being positive. I’d never want to take an incorrect positive stance.

Haters Gonna Hate

Hating clouds your judgement. People are at their worse (and illogical) when they’re offended and outraged.

M.G. made his mark by making the Apple bears look like fools. While most were writing about “Peak Apple”, M.G. saved their claims as claim chowder. When their foolish predictions were proven incorrect, he call em out. Yet, here is M.G., three years ago, incorrectly claiming (by nearly 500mm users) that we reached Peak Facebook.

Gruber, Siegler and Constine all took bearish stances on Facebook the last couple of months. I decided to go against the grain and defend them. As Facebook’s latest earnings report shows, the media once again overreacted.

And there you have it, my negative take on negative takes. M.G. is right, stick to being correct first and foremost, but there is too much positive going on in this world to focus on the negative. Negative bias appears stronger than Positive bias. Those who hate tend to get it wrong.

As I write going forward, I want to concentrate on the following. Write about what I know. If I don’t have anything good to say, I won’t say it all. I’ll find something else to cover. Put your money where your mouth is. If I write positively about a company, I should own their stock. And finally, write using a voice. This last part, the most important, is also the toughest.


Snap Back

Posted: February 23rd, 2018 | Author: | Filed under: Investing, snapchat | No Comments »

Snap Rocket

Our work during 2017 is proof that we aren’t afraid to make big changes for the long-term success of our business

– CEO Evan Spiegel

As I’ve been preaching on this blog, buying $SNAP requires patience. Snap (via Evan) continues to plan and execute for the long term. In Q4, Evan shifted the main goal of establishing a self-serve ad model to increasing user growth. Evan planned to do this by a UI Redesign, a new Android app and modifying the feed. When Evan announced these changes I expected results to take time. Three months later, and Snap has its user growth mojo back.

User Growth

Wall Street loves user growth. Although Snapchat has continued to grow every quarter the rate of the growth slowed. This freaked Wall Street out, who assumed that trend would last forever. Snap released improvements to the Android App that resulted in less crashes. This led to a 20% user retention increase. This change reversed the trend and Snapchat had 5% user growth compared to 2.9% in Q3.

This is great news and much quicker than I anticipated. What will happen in Q1 2018? Two major things are at play here. On one hand, Snap has rolled out a significant UI redesign. This design will alienate some of the most loyal users in the short term. Like Facebook News Feed redesigns, Twitter expanding to 280 chars, etc before it. Snap runs the risk of slowing user growth in the short term. In the long term, the easier-to-use UI will help onboard new users.

But, Snap has begun to take a page out of Facebook’s playbook. Snap is working with the ecosystem around Snapchat to help user growth.

We have recently launched partnerships with wireless carriers in over a dozen markets to begin reducing cellular bandwidth costs for Snapchatters around the world. We have seen that when data is less expensive, more people are willing to use our data-intensive products. This is important because Snapchat can be more fun to use out in the world rather than at home on WiFi.

Snapchat’s biggest headwinds are smartphone adoption, cellular broadband speeds and cellular data plan pricing. There are many strategies Snap can use to ease these headwinds. Similar to Facebook’s “Free Internet” play in emerging markets, Snap’s first attempt is to subsidize data plans with the goal of acquiring users. In the future, Snap could help subsidize smartphone contracts or make a “Lite” version of Snapchat.

This strategy will appease Wall Street’s user growth desires but will take a long time to increase revenue. The question is, is this the best place to invest time and resources or is improving the app and self-serve monetization? Can Snap do all three like Facebook has been able to do?

Bottom Line

In 2017, Evan focused on self-serve ads. Evan successfully (painfully?) transitioned the company to 90% of ads purchased programmatically. In Q3, Evan announced a shift in goals to user growth and was able to immediately show results for that promise. Evan continues to deliver on his promises. This reminds me of when Facebook had exactly $1b in profits the year leading up to the IPO. Hitting that profit goal was Zuckerberg’s way of conveying to Wall Street that he had ultimate control of the company.

Going forward, it is important to keep in mind what Snap is focusing on. If Snap is focusing on User Growth in Q4 2017 and Q1 2018 there could be a slowdown in ARPU growth. One quarter of a dip in the growth rate of a main metric is not a death sentence. Focus on the metric Snap is focused on.


Bubble Bobble

Posted: January 24th, 2018 | Author: | Filed under: cryptocurrency, Investing | No Comments »

Bubble Bobble was a great game! Nearly as much fun as watching the Bitcoin Bubble predictions.

What the heck is a Bubble?

A bubble is an object that has a large volume/surface area with little intrinsic substance. Bubbles can get bigger and bigger…and then they pop.

An economic bubble is trade in an asset at a price or price range that exceeds the asset’s intrinsic value. What the fuck is intrinsic value? Well, that’s where things continue to get murky (and subjective). One uses fundamental analysis or technical analysis to determine intrinsic value. Some “experts” use top-down analysis (what does the industry look like, what are the macroeconomic factors). Others use bottom-up analysis (what are the specifics of the company).

Here’s the thing. There is no consensus on what the intrinsic value of an asset is. Like market analysis, it’s in the eye of the beholder. Some claim Bitcoin’s intrinsic value is zero but why? With no precedent, there is no reasonable way to determine Bitcoin’s intrinsic value.

Bubbles of the Past, Not That Scary

We’ve heard about the big ones – Tulip Mania, Dot-Com Bubble and US Housing Bubble.

Tulip Mania was not the tulip bulbs but Future Contracts on tulip bulbs. Two quotes from the Wikipedia article sum it up for me

“In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis”

“Many modern scholars feel that the mania was not as extraordinary as Mackay described and argue that not enough price data are available to prove that a tulip bulb bubble actually occurred”

One of the most famous bubbles may not have been a bubble at all.

The Dot-Com Bubble is a modern bubble many of us lived through. I have a different lesson learned than the masses. It’s not that the market was wrong during the Dot-Com bubble, but it was ahead of its time. The NASDAQ peaked at ~5,100 in February of 2000. It recovered in 2015, fifteen years later and is now ~50% higher than its bubble peak (~7,500). There was a bubble but the market recovered with time.

Bubble recovery

Bubble recovery

The Housing bubble of 2006-2007 took an even shorter time to recover. By 2016, the average US house price was back to the 2006 levels.

Housing Prices

Housing Prices

Argument for a Bitcoin Bubble

  • 1,100% price increase since last year
  • Price increase does not appear to be in step with utilization (hard to say for sure)
  • Adding “Blockchain” to a company’s name or companies launching their own cryptocurrency (see Kodak) are having a (irrational?) run up in their stock price
  • People can buy Bitcoin on credit through exchanges like Coinbase

As far as I can tell, all arguments that Bitcoin is a bubble boil down to the fact that its increased in price “too fast”.

Argument Against a Bitcoin Bubble

  • Bitcoin is special. It’s not a company that can run out of money. It’s not a real-estate market that the government and banks affect. Any comparisons to previous bubbles fall flat due to the uniqueness of Bitcoin
  • Bitcoin is being used as a value-store. The government cannot manipulate Bitcoin through printing more currency (like gold). Gold’s current market cap is $7.8 trillion. Bitcoin’s market cap is under $200 million. That market for a value store is massive.
  • Network effects. The more people who have cryptocurrency the more (intrinsically) valuable it is. The enthusiasm around Bitcoin and its price run up has created momentum. More people have Bitcoin than ever. Products, like wallets, exchanges, payment systems and more have been built around Bitcoin. BTC is the default cryptocurrency used to by other cryptocurrencies. Despite is volatility compared to USD, Bitcoin is considered the “safest” cryptocurrency and many flock to it at times of uncertainty.
  • Macro trends. The world continues to become more connected and more digital. A government controlled fiat currency is not attractive to those in the developing world. A future with separation of Money and State, like the separation of Church and State before it, may be the way to go.

Predicting a Bubble

Like timing the market, predicting a bubble is tough work. Real estate has been around for thousands of years yet most missed the “Big Short” opportunity. The stock market went through the 1929 crash yet the Dot-Com bubble still occurred.

Recently many bears predicted a Venture Capital bubble yet that market continues to be robust. Others have been predicting a US Stock Market bubble for a decade now yet that market continues to grow as well.

Despite having hundreds of years of history with stocks and real estate the “experts” have not been able to predict bubbles. These same experts believe they can predict a bubble in something that has no good precedent to compare it to.

Bottom Line

No one knows if Bitcoin is in a bubble or not and those who say they do are full of shit. Why do people want to claim a Bitcoin Bubble? Are they jealous of those Bitcoin Millionaires? Are they fearful of something they don’t understand? It’s one thing to be bearish on Bitcoin, it’s another to be adamant it’s a bubble.

Bitcoin is Dead. Long live Bitcoin!

 


Beautiful Bitcoin

Posted: December 20th, 2017 | Author: | Filed under: cryptocurrency, Investing | No Comments »

Beautiful Bitcoin

Like many, I’ve become obsessed with Bitcoin and cryptocurrency. Sure, it’s fun to buy Bitcoin on Coinbase. Checking the price compulsively, the emotional ups and downs. I like that sort of thing but it’s not for everyone. Those who think that’s all Bitcoin has to offer are only looking on the surface. The more you learn about Bitcoin the harder it becomes denying the beauty.

The Origin Story

Bitcoin’s beauty starts with its origin. Satoshi Nakamoto is a pseudonym used by the creator(s) of Bitcoin. There are a couple of theories on who Satoshi could be but no smoking gun. Satoshi may have created this persona to protect the long-term viability of the network. A person or group of people with grand inspirations to change the world but not take the credit. Not as cool as being born to a virgin but that’s a cool birth ;). An origin of mystery.

The Design

Peer-to-peer network, cryptography, immutability, the distributed ledger aka the blockchain. Bitcoin uses these concepts to create a flat, decentralized network where every node is equal. Like the internet before it, this type of design pushes innovations to the edge of the network. This elegant design allows people to innovate as they please on the edges.

Growth

After Bitcoin’s birth on January 3rd, 2009 a handful of developers in the digital/cryptocurrency space downloaded the software. Over the next eight years, as critics ridiculed Bitcoin, the value appreciated to a market cap over $300b. At first, a group of passionate engineers and others improved Bitcoin, built applications around it and promoted the heck out of it. Since then, people in finance, economics, e-commerce and more have flocked to Bitcoin. They helped create an ecosystem that will allow Bitcoin to achieve its potential. People from online poker players, to long-bearded cryptographers, to the Wall Street bros all working to make Bitcoin a success is a thing of beauty.

The Skepticism

For every person involved in the Bitcoin community, there has to be 10 who are skeptical. These people believe Bitcoin is a Ponzi scheme or a scam. At the very least they believe Bitcoin is in a bubble.
 
In 2017, I like to use Bitcoin as a Rorschach test. Among the reasons for the skepticism, there are common themes that emerge. Some are fun conversations about what is money, what qualities do a currency need to succeed, what is good or bad about our current banking system. Many times Bitcoin skepticism comes from a place of fear. A fear of the complexity of Bitcoin. The fear of change.
 
Bubble speculation is all the rage. Everyone is a woke investor, cautious to avoid the mistakes of the past. But spotting a bubble is tough and if this is a bubble, it’s not like one we’ve ever seen before.
Fearful when others are greedy and greedy when others are fearful.
The current situation reminds me of this quote attributed to Warren Buffet. How do we interpret this advice with Bitcoin? As many “greedy” types I’ve met bullish about Bitcoin I’ve met many more fearful types. Despite the big run-up, it may still be time to be greedy.

The Bottom Line

It’s fair to be skeptical of the price of Bitcoin. It’s fair to think Bitcoin may not be the cryptocurrency to survive. But do not let the newness, complexity and others’ exuberance shroud your ability to appreciate its beauty. Cryptocurrency is here to stay. It’s changing the world and we’re all going to have to change with it. Enjoy it.

Changing in a Snap

Posted: November 20th, 2017 | Author: | Filed under: Investing, snapchat | 1 Comment »

snap evolution

After two defiant quarterly result calls, sticking to the plan, Q3’s call was different. Evan, for the first time since Snap went public, acknowledged it was time for drastic changes. Achieving user growth by a UI Redesign, a new Android app and modifying the feed are all in the works.

Some want to take the course change as a sign that Evan doesn’t know what he’s doing. That Snap has grown beyond Evan’s abilities. I’m taking the other take. This shows Evan isn’t stubborn and changes when the time calls for it.

I have concerns that Evan is buckling to pressure. Is Evan worried about appeasing Wall Street in the short term? Has he seen enough data to come to his own conclusion about Snap’s growth potential? That’s the question.

Data Crunching

At 178mm users using Snapchat over 30 minutes a day, Snap is a wildly popular product. But with a $15b market cap, Snap needs more than 178mm users to eventually hit a reasonable P/E.

Snap Modeling

Snap Modeling

Snap’s main financial levers are DAUs, ARPU, Cost of Revenue and Operating Expenses. DAU x ARPU gives us total revenue. Snap must increase DAU and ARPU at a rate higher than Cost of Revenue and Operating Expenses to become profitable. In the model above I’ve assumed a DAU q/q growth at 3%, ARPU growth at 15% while maintaining a 3% growth on Cost of Revenue and a 2% growth on Operating Expenses. That gives Snap healthy cash flow by the end of 2019 but its path to get there is uncertain and is not quick enough for Wall Street to tolerate.

There are chances Snap can hit profitability with modest user growth if Snap is able to greatly increase ARPU. With another large investment from Tencent, parent company of WeChat, Snap has access to a wealth of Tencent experience to help further monetize their base.

The Changes

Evan has stated Snap’s priorities in 2017 have been performance, quality, and automation. Android performance has improved but not as much as Snap was hoping for. On the quality front, Snap has invested in a device testing lab that should bear fruit in the future. On an Automation front, Snap has made huge strides moving its ad business to self-serve. For a company going public with the need to automate, these three priorities made sense for 2017.

The three new priorities for 2018 are user growth, content, and augmented reality. As seen above, unless there is out sized ARPU growth, more user growth is necessary to hit profitability.

User Growth

Redesigning the UI

Last month I defended Snapchat’s UX, pointing out that an intuitive UI is not the be all end all. I stand by the post but understand why Evan and Snap may have to migrate to a more intuitive UI. Snap continues to kill it in the 18-34 age group but has room to grow with other demographics. Evan seemed to wanted to stick with what got Snap this far and not dumb down the UI but the user growth stagnation seems to have changed his mind. This move is risky, how many current users will be alienated and defect?

Facebook and the algorithmic newsfeed, Twitter with an algorithmic newsfeed (and 280 characters). Keep in mind many before Snap have made drastic changes to the core UX and continued to grow.

Android app

The Android fragmentation is giving a company like Snap a run for their money. Snap likes to push the envelope with what a mobile device can do with Snapchat and this strategy has many risks. A rewrite is a costly, risky but with global domination in mind, having a rock solid android app is Snap’s only hope. This bet reminds me of Facebook’s first mobile stumble when they bet too much on HTML5 and had to rewrite their app with more native components. Although risky, this move at this stage appears to be the only hope.

The Feed

Evan wasn’t specific about the changes to come but what he did say showed an astute understanding of Snap’s users.

I think there’s a really exciting opportunity here for another evolution of that content feed that addresses some of the shortcomings of the friend-based content feed model.

So, for example, in a friend-based content feed, in order to get more content in that feed, you need more friends. When people start adding more friends, they then feel less comfortable posting content and so they start posting less. That means that you need even more friends to get more content. So you end up in this kind of precarious situation where because you base the content feed on what friends are posting, you sort of are inherently limited in how you grow that selection of content. Ultimately, what we found is that the best predictor of what people are interested in and want to watch is actually what they’re watching. I think there’s an opportunity here for us to create a really great personalized content service that doesn’t at all diminish the great and, I think, very differentiated communications business that we’ve established.

I’m a big fan of companies having a unique identity and Evan highlights a unique position Snap has with its users. Snap continues to be a place where friends share themselves more authentically with others than on Instagram or Facebook. This is why some will gravitate to Snap even if Instagram had the some features. How can Snapchat grow its user base and engagement while avoiding the “posting less” phenomena? I can’t wait to see what Evan has up his sleeve.

The Bottom line

Snap has not concentrated on “User Growth” as a priority in 2017. Snap is no longer growing the user base at a rapid pace organically and its long-term business prospects do not look as high as they once did. Does this mean Snap is done for? No, not in the slightest. Snap has made user growth a priority, identified areas which has impeded user growth and is actively working to improve these areas. Evan has evolved Snap before and will do it again.


Keep Calm and Snap On

Posted: August 18th, 2017 | Author: | Filed under: facebook, Investing, snapchat | 1 Comment »
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 $0.50 to $1.05. ARPU increased 16% over Q1 2017 when ARPU was $0.90.
  • Total revenue grew 153% year-over-year and up 21% 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.


Oh Snap!

Posted: May 18th, 2017 | Author: | Filed under: Investing, Product, snapchat | 1 Comment »
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.


Has Facebook’s Social Network Peaked?

Posted: April 1st, 2015 | Author: | Filed under: facebook, Investing | No Comments »

The big question mark in my mind is if Facebook can monetize the new Facebook Federation fast enough to counter the eventual decline of Facebook, the social network.

To be clear, as the network approaches 1.5 billion active users, it’s not going away any time soon. But I’d bet on a slow decline of the main product starting sooner rather than later. (Who knows if they’ll ever admit this though since Messenger users are technically Facebook users and many people I know have Facebook open on their desktops just to use Messenger.)

The Facebook Federation

MG did a good job avoiding the tiresome claim that Facebook the company would die, but did decide to vaguely predict the peak of Facebook, the social network.

Is Facebook diversifying and splitting up the Social Network a bit? Yes. Has Facebook, the Social Network, peaked? Not based on anything objective that I can think of – total users, daily active users and money per user.

Screen Shot 2015-04-01 at 1.33.45 PM

Facebook Daily Active Users

Screen Shot 2015-04-01 at 1.34.22 PM

Facebook Average Revenue per User

The numbers tell a much different story than MG’s gut feeling. Daily Average Users continues to grow, dollars per user also continues to grow and at an impressive rate. Although there are 1.5 billion people on the network already there are nearly 3 billion people with access to internet. There are also 4.2 billion people without access to the internet, which Internet.org is attempting to address. There are plenty of people that Facebook can go after to grow the network. Law of Large numbers be damned.

Perhaps MG has experienced Facebook fatigue, his usage of the Social Network may have peaked but the numbers do not indicate it’s peaked for the rest of the world.

Based on the post, it appears MG feels Facebook’s diversification is what signals to him the Social Network has peaked. Google and Amazon have also similarly diversified but I believe their cash cows – Google.com and Amazon.com are far from their peak.

The Social Network will evolve but I believe it’s far from it’s peak.

Disclaimer – I own $FB, $GOOG and $AMZN