Snap Q3 17 – Sixes and sevens.

Reply to this post

Dreadful results reveal a company in disarray.

• Snap reported weak results that bear all the hallmarks of a small, weak player being ground into the dust by a larger, much more powerful rival (see here).
• Furthermore, Snap now finds itself being forced to redesign its user experience in a desperate attempt to drive user growth which, by its own admission, puts at risk the usage and revenues it already has.
• Signs of disarray are everywhere from a sudden desire to redesign its user experience (see below) to a failure to update its mission statement following the failure of Snap Spectacles (see here).
• Snap still describes itself as a camera company (see here) despite taking a $39m write-off of camera hardware after failing to sell the units.
• Q3 17 daily active users (DaU) and revenues were 178m / $207.9m falling well short of consensus at 180.5m / $235.5m.
• Revenues have been depressed by the shift from direct sales to programmatic advertising which has had a significantly negative impact on advertisement pricing.
• This transition is now largely over as 80% of revenue now comes from this form of advertising meaning that growth should be better going forward.
• However, the two most important measures of a company’s ability to monetise its users: Digital Life coverage and active users are both stagnant.
• Snap’s Digital Life coverage remains at 14% and without major traction in another area like Media Consumption or Gaming, it is unlikely to change for the foreseeable future.
• I think that Snap’s active users are not growing because Instagram has successfully copied all of Snap’s user experience innovations and made them easier to access.
• The result is that users are no longer leaving Facebook to go to Snapchat but instead simply switch over to Instagram Stories for this type of service.
• Hence, I think that the end result is that neither its Digital Life coverage nor its user count has any real scope to expand from here.
• Putting this into the context of RFM’s monetisation analysis (see here), means that once Snap Inc. has monetised its full potential, growth will grind to a halt as it has at Twitter.
• Furthermore, tinkering with the user experience runs the risk of putting off its existing users which could cause active users to decline which would put a major crimp on the company’s ability to monetise.
• Snap has a core user base and revenue opportunity which, in my opinion, still values the company at around $12.40 a share.
• This is not far from where it is now following the 17% after-hours correction on 7^th November 2017.
• However, I still think that the stock needs to dip below $10 before I would consider looking at it as it is at this point that potential acquisition interest may materialise.