SNAP not looking so snappy

At the time of writing, Snap Inc is trading at 12.31 – down from 13.10 on Tuesday prior to their earnings call. Last year, I wrote a quick blurb on speculation surrounding a potential acquisition of Snapchat by Alphabet. In that post, I mentioned that Snapchat’s growing user base and technology would be the key to posting $2bn+ revenues by this time. Well, a year and a week later, SNAP is showing a loss in their Daily Active Users (DAU) and posting revenue figures just above $260M. After I wiped the egg off my face, I listened to the earnings call and my bullish optimism was replaced with pretty stark surprise that SNAP was still trading above $12.

Now, to be fair, Snapchat has shown an uptick in revenue; they beat analyst expectations by a healthy $11M which means they’re posting an EPS of -$0.14¬†instead of -$0.17. Since Spiegel & Co. didn’t lose the same amount of money that traders thought they would lose the stock went sideways in the latter half of the week instead of dropping like a lead weight. But that might just be temporary market irrationality because nothing from the earnings call gave me any indication that this was a healthy company.

A lot of these platform-based tech stocks don’t post profits immediately – it had become commonplace for growth to be more important than monetization. Applying the focus to a vibrant userbase and being able to extract telemetry from their interactions is still a solid business model – but Snapchat’s woes can be found in both the growth and money categories. The leadership avoided talking about DAU on the call and, when they did talk about it, it was in terms of annual growth where they could point to an 8% increase year-over-year. It sounded like there was an attempt to quash DAU as a guidance metric altogether which would make sense since showing such a middling YoY increase and spinning that as the focus when the same metric shows a¬†loss of users when compared to Q1 raises eyebrows. Social media isn’t meant to be seasonal. If Snapchat is having trouble retaining users, that’s a heavy indicator of a stagnant platform.

On the revenue side, Snapchat is trending upwards but I’m not confident. Ultimately, Snapchat’s a platform to deliver ads to users and nothing in the call or in the slide deck gives me any reason to believe that the company is hitting home runs in that department. When the leadership was asked about the “Discover” section of the app (which I had only found out about on the call) they copped out and talked about how they were developing that section to be more robust. No metrics on ad engagement, no highlights of increased telemetry opportunity, and no platform conversion rates. Either this is information the company doesn’t have, which would be a major red flag, or this is something they know is wanting. The entire advertising highlights section of their slide deck is almost entirely about improvements to the self-serve platform and serving up ad campaign insights. The bullets are basically as follows:

  • We didn’t want to keep manually selling Story Ads so that’s automated
  • We finally got campaign management out of beta so now even your local haberdasher can list ads and know they’re being ripped off
  • The people that were complaining about being ripped off can now see how they’re being ripped off in different colors
  • We didn’t want to keep manually selling ads so that’s mostly automated
  • We want to be YouTube
  • We’re able to expose more user data to advertisers than before (this one is probably the most encouraging)

Automation is a welcome improvement – with a significant negative cash flow, SNAP should free up some money and start focusing on reducing infrastructure cost. Assuming their investors stay on board, there’s still hope for Snapchat. Their Revenue Per User (RPU) is looking healthy everywhere that’s not North America and R&D budgets are looking stable. For a company with huge technology appeal (facial recognition is still very exciting) we can’t count out a future partnership or even acquisition by a group who can eat the costs associated with running a profit-negative platform. I guess I’ll have to check back in August of 2019.

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