Snap Inc. – Troublesome hardware.

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Another plan that failed.

• With the reorganisation of its hardware division, Snap Inc. is admitting that it made a wrong turn with its spectacles which despite being cool, no one bought.
• Steve Horowitz will now become president of technology and report to the chief strategy officer rather than the CEO in what can only be a significant demotion.
• A large part of the marketing effort has also been terminated with the COO of hardware, Mark Randall presiding over the vestigial remains.
• Despite being viewed as pretty much the coolest wearable device available, Snap Spectacles only managed to rack up around $5m in revenues during Q2 17.
• This clearly indicates that hardware was running at a substantial loss and with no turnaround in sight inevitably resulted in the cuts we have just witnessed.
• All references to becoming a camera company have now been quietly deleted leaving the company at a dead end when it comes to hardware.
• As Google and Facebook are finding, doing hardware when one is a software company is much more difficult than it sounds and I would not be surprised to see Snap quietly drop this idea completely.
• This leaves Snap with little differentiation over Facebook which remains its biggest problem.
• Instagram has a habit of copying all of Snap’s best innovations and pushing them out to its much larger user base pretty quickly.
• This makes it extremely hard for Snap to compete as apps that offer communication are all about the network of users.
• Metcalf’s Law of Networking states that the utility or value of a network increases by the square of the number of devices attached to it.
• This would imply that Instagram should be at least 16x more valuable than Snap meaning that at Snap’s valuation, Instagram makes up more than half of the valuation of Facebook.
• Instagram is an important part of Facebook but I don’t think it is contributing more than 50% of Facebook’s value.
• Hence, I would be inclined to believe that Snap remains meaningfully over-valued.
• I think that fair value for Snap remains around $12.40 per share which is still 10% below where the shares are today.
• I still think that negative sentiment could push the shares closer to $10 at which point acquirors could start to take interest.
• Until then I still see no reason to get involved and would strongly prefer Twitter to Snap Inc. (see here)