Trillion Dollar Apple

Posted on August 30, 2018 by mikejsiegel

Not So Peak Apple

When Steve Jobs returned to Apple in 1997, Michael Dell, CEO of Dell, was asked what he’d do if he were in Jobs’ shoes, Dell said:

“What would I do? I’d shut it down and give the money back to the shareholders.”

In 2006, when the Apple smartphone rumors started building steam, Ed Colligan, CEO of Palm had this to say

“We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”

In 2007, when Apple was on the verge of releasing the iPhone, Steve Ballmer, CEO of Microsoft had this to say

“Now we’ll get a chance to go through this again in phones and music players. There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

Beyond those infamous quotes, there has been an onslaught of “Peak Apple” predictions and articles from every corner. Below you can see the Peak Apple articles themselves hit a peak in October 2011, when Steve Jobs passed away.

Fast forward to 2018 and a lot happened. Dell shrunk and had to go private. Palm was acquired and is out of the smartphone game. Microsoft is out of the smartphone game and Ballmer retired. But one thing has remained the same, Apple continues to grow.

How it Got to a Trillion

Apple’s march to a trillion starts off with Steve Jobs’ integrated approach to creating products. Unlike Dell, who focused on the hardware, or Microsoft who focused on the software, Apple focused on both. During the 80s, 90s and early 2000s, this integrated approach to building PCs was great but not as great as a business as Dell’s and Microsoft’s specialziation strategy. Dell and Microsoft made more revenue during this era but Apple was building an expertise – building hardware and software that worked in harmony.

In 1997, Steve Jobs returned to a down-and-out Apple as CEO. Apple had lost its way and Jobs immediately cut down the product lines to establish focus. This focus enabled Apple to be ready for the next big opportunity, the iPod in 2001. The iPod was the first modern device Apple made that leveraged its competitive advantage of building integrated products to take advantage of a macro trend, in this case the rise of MP3s.

The focus, the integrated product approach and specifically the iPod set Apple up to take advantage of perhaps the biggest product opportunity ever – the smartphone. As wireless broadband, ARM processors, lithium batteries and touchscreen technology reached a point of maturity, Apple was ready to pounce and exploit its expertise to fill an enormous demand for smartphones. And pounce they did, creating the iPhone that has been the main revenue driver that allowed Apple to become the first publicly traded $1 trillion company in the US.

What’s Next For Apple?

Is this it for Apple? Is this the peak? I sure as hell won’t make the mistake of attempting that prediction.

The iPhone will continue to be a money maker for Apple for some time. Despite experiencing a plateau with total iPhones shipped, the iPhone continues to grow in revenue by moving more high-end and adding more tiers. Furthermore, Apple has opportunities to ship more units as India and China’s middle class grows, time will tell if we’ve reached peak iPhone shipments. The services revenue and peripherals (Watch, AirPods) will continue to grow revenue for Apple.

But keeping the status quo is not the company Steve Jobs wanted to build and it’s not the company he left behind. Like Walt Disney before him, Jobs established a company of values and conviction that can survive and thrive well after his death. Perhaps the best part about speculating Apple’s future is how tight-lipped they are with future plans. Will Apple ride the VR wave? Will Apple be a player with autonomous cars? We don’t know the answers to that yet but you can bet Apple won’t rest on its laurels. Apple will, for the most part, avoid increasing revenue through acquisitions and will instead invest heavily in creating products that allow Apple’s integrated approach to shine.

Growing Facebook, Inc.

Posted on July 31, 2018 by mikejsiegel

It’s been a wild ride for Facebook’s stock in 2018. It was punished by “Cambridge Analytica” in April but had a big ramp up from May-July resulting in an all-time high market cap of ~$630 billion dollars.

But that changed when Facebook released its earnings last week. The stock dropped over 20% and the current market cap is closer to $500 billion. Wall Street is spooked about Facebook’s guidance for slowing growth.

Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4.

– Facebook CFO Dave Wehner

Is the market acting rationally? Was the earnings report “abysmal” like many hot takes have labeled it?

Financial Fundamentals

In Q1, FB’s revenue grew 49% yoy. In Q2, FB’s revenue grew 42% yoy. This new guidance puts FB’s Q3 growth greater than 32% and Q4 growth greater than 22%. Although this guidance is lower this is incredible growth for a company of Facebook’s size. Apple, Google, and the all mighty Amazon have all averaged growth under 30% yoy the last decade. Even with Facebook’s revised guidance, it is ahead of the pace of its peers. With its P/E at 23, this gives FB a PE/Growth (PEG) of well over 1. According to value investor Peter Lynch, Facebook is cheap from a fundamental perspective.

It seems difficult to label this earnings call as abysmal. The fundamentals are strong with few attacks on its current business model. But does this make Facebook a value stock instead of a growth stock?

#DeleteFacebook

The height of #DeleteFacebook was in April and any ramifications were reported in the earnings last week. US & Canada were flat with both DAUs and MAUs, which means few followed through with deleting their account. European users saw a decrease in DAUs which Facebook is attributing to GDPR rollout, not towards #deleteFacebook.

The good news from the earnings report is that there is no mass user exodus. All “Peak Facebook” predictions have fallen flat. That being said, user growth of Facebook.com may move closer to internet growth in general. But should Facebook’s growth potential be evaluated based on Facebook.com’s user growth? Or should Wall Street start paying attention to the new number rolled out these earnings –

For the first time today, we’re also releasing how many people use at least one of our apps, Facebook, WhatsApp, Instagram or Messenger, and that’s 2.5 billion people each month.

-Mark Zuckerberg

WhatsApp, Instagram, and Messenger can all continue to grow for years to come. Since Facebook provides a way for advertisers to target users on any of their apps, it doesn’t quite matter which of these apps the eyeballs are on. Therefore, revenue growth is no longer as tied to Facebook.com’s user growth as it has been in the past.

Areas of Growth Opportunity

Stories

The biggest place Facebook has work to do is in monetizing Stories. After paying $22 billion dollars for WhatsApp in 2014, Facebook finally has an opportunity to make some of that dough back. WhatsApp has 450mm DAUs on WhatsApp Status (their stories format). Add another 400mm for Instagram stories and 150mm on Facebook stories and you have a lot of eyeballs to monetize.

Like the mobile monetization before it, I expect Facebook to easily capture value with Stories. In Facebook’s early days as a public company, many doubted its ability to advertise effectively on mobile. Today, it accounts for 91% of Facebook’s advertising revenue

Mobile ad revenue was $11.9 billion, a 50% increase year-over-year, making up approximately 91% of total ad revenue.

Similar doubts exist about Facebook’s ability to monetize Stories. These doubts will go unfounded as time goes on. The uncertainty around monetizing mobile ads were more founded than Stories since no other mobile app was monetizing ads at scale when Facebook started that journey. But with Stories, Facebook (and Wall Street) has Snap to use as a model. Snap is pulling in ~$1.20 per quarter per user from Stories monetization (and growing 35% yoy). With over 1 billion DAU Stories users, Facebook can easily make another $1 billion per quarter from these ads (and I expect much more as time goes on).

Marketplace, Workplace, and Occulus

Like Google before it, Facebook continues to attempt to diversify its revenue streams but so far all attempts are dwarfed by the mega success of their advertising products.

“Payments and other fees” brought in $193mm, which is 1.5% of total revenue. This means that Marketplace, Workplace, and Occulus are not producing significant revenue. Although this is an area of opportunity this is also an area to keep expenses down. Facebook remains more focused than Google and Amazon, but can Facebook make the tough decisions? Can/will Facebook shut down a major effort if it underperforms?

Based on its low PEG, you can make an argument that Facebook is a value stock. But its growth days aren’t over as last quarter has shown. When you consider the revenue growth and user growth potential of products under the Facebook umbrella, it becomes clear that Facebook is a growth stock with fundamentals that appeal to a value stock investor.

FB will reach a new all-time high before 2018 is over. The $1 trillion market cap is still less than five years away. Facebook’s growth isn’t over yet.

Disclaimer – I own $FB and am biased AF

Facebook is F*cked, Long Live Facebook

Posted on June 28, 2018 by mikejsiegel

In March, in the thick of the Cambridge Analytica and #DeleteFacebook “movement”, I wrote a piece defending Facebook.

It’s now June and time to reflect. Zuckerberg has been dragged in front of Congress and the European Parliament. The Cambridge Analytica headlines have slowed. #DeleteFacebook is no longer trending. Facebook released earnings results which showed user growth, not users leaving Facebook. Furthermore, Facebook’s stock has reached an all-time high, over $200 a share and a near $600B market cap.

Facebook Nevers

MG Siegler remains a top 5 tech writer in my book but I disagree with his Facebook analysis. After seeing #DeleteFacebook was a complete joke, MG has turned his rationale for Facebook’s inevitable decline…”Facebook Nevers“.

The fall of Facebook was never going to be people quitting the service en masse — it’s too interwoven into the fabric of the way many of us use the web these days — it was always going to be the people who never really use the service in the first place. Kids.

MG compared Facebook to Cable. It’s not that people will quit en masse but youngsters won’t sign up. He acknowledged that probably wasn’t the case –

But again, Facebook is so integrated into so many lives that in many cases you’re basically forced to sign up. Even the kids in many cases. Just as they must sign up for an email account. It’s a rite of passage, in a way. Your entrée onto the internet. So perhaps “never” is a bit harsh of a word here.

Anecdotally, what MG says in the last quote is what I’ve experienced. All of my younger cousins are on Facebook but don’t post to it much (it’s unclear how often they lurk). MG’s analogy to email is spot on here but he missed the larger arch. Young people will sign up for both email and Facebook early but won’t use either…until they become adults. They’ll use email when they go to college and much more when they enter the workplace.

Facebook is awful when you’re finding yourself as a kid. But it’s awesome when you’re stuck at home raising two young children. Sharing your children grow with people around the world is amazing for parents. Facebook will have less use in the 13-25 demo but once people enter parenthood, their behavior will change in many ways, including how they use social media.

$100B Instagram

According to “Bloomberg Intelligence”, whatever the hell that is, Instagram is now worth $100B. That number may as well be right but something is worth how much someone is willing to pay for it, not based on what data or some analyst says. That being said, Instagram is killing it.

In March, I said –

Few will #DeleteFacebook and those who do will come back or increase their Instagram use.

This appears to have come to fruition. Instagram now has over 1 billion users with 400 million users using Instagram Stories daily. That’s a shitload of engagement. For some reason Facebook is not releasing time spent on Instagram so attempts to compare it to Snap is apples to oranges.

Who knows if Instagram is worth $100B but it’s safe to say it’s not being factored into Facebook’s valuation reasonably. With Facebook’s PE hovering around 25, the market isn’t expecting much growth from a product now responsible for over 15% of FB’s revenue (and growing rapidly).

Facebook to A Trillion in Five Years

Now that the media cycle has passed and the Facebook bears have went into hibernation, we can talk about where Facebook is going. Five years ago Facebook’s market cap was ~ $60B. Many thought that was absurd but here we are, five years later and $FB is worth 10x more.

Facebook is ~$400B (1.7x growth) away from the elusive $1 trillion market cap. With revenue growth at 47% in 2017 and PE at a reasonable 28, it’s hard to see this locomotive slowing down anytime soon. To get to $1 trillion dollars, FB needs to average a paltry (for Facebook) 12% market cap growth a year.

Facebook growth with 12% yoy market cap growth per year

How does it get there? Can Facebook continue to grow its user base past 2 billion? Although there are another 6 billion people to go in the world, Facebook can reach $1 trillion through ARPU Growth.

Over the past seven years Facebook has averaged 26% growth in revenue per user. Continuing this trend alone will push Facebook past the $1 trillion mark with ease. User growth, monetization of WhatsApp, Oculus revenue etc is icing on the cake.

Facebook’s demise was media hype. Instagram will continue to grow its user base and monetization. Facebook proper will continue to be Facebook, serving 2 billion people a day content and ads. ARPU will continue to increase. In 5 years, $FB will be worth $345/share at a $1 trillion market cap.

There are dozens of reasons why these predictions may not happen, but I’m putting my money on Zuckerberg and Facebook. Easy money!

Disclaimer – I own $FB and am biased AF

Smart Speaker Wars

Posted on May 31, 2018 by mikejsiegel

Like the Apple Watch and AirpPods before it, many think the HomePod is a flop. There are common criticisms and rationale behind this sentiment. In the end, the HomePod will play out like the Watch and AirPods. It’ll be the most loved and most profitable product in its market.

The “Smart Speaker” category is just getting started. Amazon, with their Echo family of speakers owns 70% of the market. Google owns 25%. But, only 20% of US Adults own a smart speaker. From the iPhone to the Watch this is one of the least mature industries Apple has entered in awhile.

Apple’s foray into Smart Speakers is the same playbook they’ve followed for decades. Apple is never the first mover, they’re always “overpriced” and “under featured”. The HomePod is all of these to the T yet those who follow Apple closely believe this time is different. That Amazon has an insurmountable lead.

The HomePod’s strengths compared to the competition is voice recognition and sound quality. Siri may not be as accurate and robust as Alexa but the HomePod is most likely to hear your command. The price point is much higher than Amazon’s and Google’s products but the sound quality is arguably the best. Smart Speakers largest use case so far is to play music. Apple is making sure they nail this.

Ben Thompson believes HomePod’s sole native integration with Apple Music is an example of Apple’s strategy of squeezing more out of current customers. He cites Apple’s iPod’s interoperability with Windows as a clear difference in Apple’s strategy with HomePod. Ben forgets the first generation iPod was only MacOS compatible. Time well tell if Apple provides better support for Spotify and Amazon Music.

Apple continues to follow Apple’s strategy since its inception – ensure Apple products work best within the Apple ecosystem first and foremost. Airplay from an iPhone, using Siri to play Apple Music – make sure these experiences work 99.9% of the time before rushing to support other systems.

Amazon’s strategy is much different. Amazon is focused on creating cheap devices. They’re on the lower end of sound quality and the price point implies the margins are slim or non-existent. Amazon doesn’t announce their strategy but there are two strategies that make sense when selling something at a loss. The first is to ensure market share and slowly but surely raise the price until you’re profitable. The second is to make money off of the device in other ways. Microsoft famously lost money on every Xbox but made it up on licensing from games sold. Google doesn’t make money off of Android but off of Google Searches on Android phones. Amazon believes those with an Alexa device in their home will buy more stuff from Amazon. Will this be true? So far there is evidence of correlation but not causation.

Beyond price, Amazon’s Alexa is a better voice assistant than Apple’s Siri. But…both leave a lot to be desired. Despite the majority of people having access to voice assistants on their phone, only 46% have used them once. Of those who do use it, only 39% found that voice assistants accurately respond to their commands most of the time. Imagine if Google Search was only 39% accurate? Voice assistants aren’t quite ready for prime time.

Apple is behind on market share. HomePod is expensive. But HomePod is the best at what people use Smart Speakers for – playing music. The price point will drop, the HomePod will support more third party devices/streaming apps and Siri will catch up to Alexa and Google Assistant. Ultimately the HomePod will never have the most market share but they will own the most profit in the category.

The Positive Beat

Posted on April 30, 2018 by mikejsiegel

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.

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.

In Defense of Facebook

Posted on March 24, 2018 by mikejsiegel

The Criticism

Facebook’s in the hot seat. Facebook is catching heat for the way a third party used Facebook data. Cambridge Analytica used data from a Facebook connected app in 2015. This app allowed a developer to harvest data from the friends of those who signed up. This gave them information about 50 million people. Names, occupations, check-ins, posts and more. The public sentiment is that it’s wrong for a company to allow anyone to hand over your data to a third party. Your friend should not be able to do so. Note: Facebook stopped allowing third parties to grab friend’s data in 2015.

It’s believed Cambridge Analytica used this data to help the Trump Campaign. Cambridge Analytica used the profile data with other data to create psychological profiles. They believed these profiles allowed them to better target political ads.

Facebook Is Not Alone

Context is key. Although it doesn’t justify being loose with data, Facebook is not alone. Apple via iOS’s “Allow Access to Contacts”. Google via Android access to Contacts and Google+. LinkedIn. All have allowed developers access to their friends’/connections’ information.

There are companies who have created large databases of our information up for a price. FullContact is a leader in this space. Use their API here to find out what they know about you.

Theories on Public Reaction

Despite the lack of evidence that this targeting was effective, the public is furious. Despite other companies allowing people to share their friends information, Facebook appears to be singled out. I’m trying to put my finger on why now and have some working theories.

Google vs Facebook

Google Search helps you find things. It’s a utility. Facebook is a community of people. Communities like Facebook elicit emotions and sometimes these emotions are negative. When you read hate spewed by a distant friend, you associate that emotion with Facebook. Facebook can be a magnifying glass on your community, and it allows you to see the warts.

Facebook is also a mirror. Facebook can be addictive. It makes it easy to see you may care about what others think about you more than you care to admit. Instead of focusing the energy on improving, many choose to blame Facebook.

The Trump Connection

The Trump association to the public outcry is hard to deny. Obama’s campaign’s use of friend’s data has not caused an uproar. Obama’s campaign did not violate Facebook’s Terms of Service. But the app did use data that the “friend” didn’t approve of. Like many things connected to Trump, his association exasperates the public reaction.

Myth vs Reality

Myth – Facebook sells your and your friends’ data

Reality – Facebook does not sell data. Facebook sells access to advertise. Facebook no longer allows third-parties to have access to your friends’ data

Myth – You are the product

Reality – Facebook must serve their users. Without the 2 billion users, there is no one to advertise to. Zuckerberg has proven he is in it for the long haul. Zuckerberg will continue the balancing act of pleasing the 2 billion users. Not to mention the media, governments, businesses and advertisers.

Google, of course, poses similar threats to the journalism ecosystem through its own digital advertising industry. But Googlers can also make a strong case that Google makes valuable contributions to the information climate. I learn useful, real information via Google every day. And while web search is far from a perfect technology, Google really does usually surface accurate, reliable information on the topics you search for. Facebook’s imperative to maximize engagement, by contrast, lands it in an endless cycle of sensationalism and nonsense.

– Matthew Yglesias, Vox

Myth – Facebook has no value to the spread of information. Facebook focuses on maximizing engagement.

Fact – Facebook provides a platform for discourse. Those posting “Fake News” may learn from the hive.

Facebook may have focused on maximizing engagement in the past but no longer. Zuckerberg has said the new goal is “to make sure time spent on Facebook is time well spent.” Zuckerberg understands users will leave if he maximizes engagement in the short-term

Facebook Regulation

Facebook is a public company in the United States and used all over the world. Facebook is under SEC, FTC, EU and many more regulations. Will new regulations form that will affect Facebook? Yes. This has always been the case. The fear the market is having now about regulation seems irrational. Facebook makes money by allowing targeted advertising. Facebook does not make money by selling (or giving away) data.

Regulation as a response from this news may make Facebook stronger. As we’ve seen with Cable regulation, regulation can create a cycle that makes it more difficult for startups to challenge an incumbent.

What type of regulation makes sense to protect user data? Governments will most likely demand tighter control of user data. This may mean no exporting of data. Less data portability makes it harder for an incumbent to bootstrap their service using Facebook data.

Incumbents will have to spend money and time to meet any new regulations around user data. Facebook has the money and resources to do this easily.

Facebook Valuation

Facebook’s PE (price to earnings) is 25. In comparison, Google’s is 31, Microsoft’s is 26 and Amazon’s is 352. Compare that to their growth rate the past ten years. Facebook’s revenue growth rate per year has been 80%, Google’s 24%, Microsoft’s 7% and Amazon’s 29%. Facebook is growing quicker than its peers yet the market is valuing its potential lower. The S&P 500 has a PE of 25. Is Facebook’s growth going to be the same as the S&P 500 like currently valued? There is sentiment to back up this valuation, and sentiment alone. Sentiment and reality aren’t always connected.

Facebook’s core business has continued to grow like a weed. Instagram continues to grow and make revenue. WhatsApp and Oculus provide little to no revenue but have great potential. With a PE at 25, it’s as if the market values these assets at 0.

Bottom Line

Facebook discontinued the level of access that caused this leak in 2015. There is no evidence this targeting affected the election. The public outcry is not without merit but an overreaction. Few will #DeleteFacebook and those who do will come back or increase their Instagram use.

Facebook will continue to be a lightning rod for criticism. Facebook will continue to improve their PR game. People will continue to use Facebook. Facebook will continue to grow, make more money and be more of an influence on society. Zuckerberg will continue the balancing act.

Note – I own Facebook shares and I’m bullish…if you can’t tell 🙂

Snap Back

Posted on February 23, 2018 by mikejsiegel

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 on January 24, 2018 by mikejsiegel

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.

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.

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 on December 20, 2017 by mikejsiegel

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 on November 20, 2017 by mikejsiegel

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’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.