Changing in a Snap

Posted: November 20th, 2017 | Author: | Filed under: Investing, snapchat | No Comments »

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 | 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 $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 | 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.


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