The Real Truth Hidden in Snap’s S1
The fundamentals their bankers don’t want you to know
I. Setting the Stage
Snap Inc filed its S1 Registration with the SEC. You’ll be seeing reports across all the major tech blogs and even the investing publications about it. Heck, you’ll probably read commentary on Twitter or even across Medium.
But it’s unlikely that they’re going to put all the subtle pieces together and give a real narrative about what’s happening with the startup and where their R&D department is headed with their product.
Read on for how this new “camera” company really isn’t, the loans the executive staff has been taking out, where their real cost center is going to be over the next 5 years, where their product innovations have come from, and where the voting power rests even if you buy a single share on the open market.
All of which has nothing to do with the narrative Snap is playing up to the Street.
Do not be fooled by well-timed marketing of a Spectacles store directly facing Apple’s flagship 5th Avenue store. These are completely different companies with completely different businesses, even if they want you to believe they’re one and the same.
The real value of Snap is not their product. Its their brand.
II. Cold Hard Facts
The first thing we’ve done is pore through the fine print in their S1. We need to look at what is actually disclosed before we can put a narrative around it. As you tick through the following, see what story your mind comes up with. It might be the same as ours, but it might be altogether different.
- Snap calls themselves a Camera company (we’ll get back to this later)
- 158M daily active users but growth is flatlining. Snap actually says in the S1, “We anticipate that the growth rate of our user base will decline over time”
- 530 mentions of the word “user”, 79 mentions of “camera”, 103 mentions of “engagement”
- 16 snaps per user per day on average (likely higher than Apple’s native camera app)
- Net loss of $0.5 billion in 2016
- Compensation for NEOs in terms of salary or equity grants is tiny compared to other public companies (of course, most is tied up in RSUs and options):
- When Evan closes this IPO, he gets a $1M bonus and 3% equity, which is valued at $750M based on the expected post-IPO valuation of $25B. That means Evan is worth over $6B on paper.
- The two co-founders own approximately 43% of the company, but they control 89% of voting power, which means whatever they want goes.
- If you buy stock in Snap’s IPO, you will NOT have any voting power. You do not get to vote on any director, employee compensation, and can’t do any sort of shareholder activism
- Snap spends 45% of its revenue on R&D.
- Snap runs solely on Google Cloud for everything including CDN, which is a 5-year agreement where Snap has to spend a minimum of $400M per year.
- Their offices are dispersed across different cities and operate more like cells rather than a single mothership.
- Flat user growth in future plus -$0.5B annual burn plus $3B IPO cash raise plus $1B cash on hand equals approximately 7 years of life before they run out of money with no additional ad revenue growth.
- Snap’s “product innovation” timeline shown below
- Snap’s acquisitions: $115M mobile search company (Vurb), $80M Looksery for lenses, $64M Bitstrips for emojis, $47M computer vision, ads, and $255M in retention compensation.
- That’s $560M in acquisition cost for the core of most of what everything people use in Snapchat. Which means the most valuable product innovation is not necessarily coming from internal operations, but rather through acquisition, which means they will continue to need more cash to continue acquiring companies for Snap’s perceived product innovation.
- Snap’s executive officers have all taken considerable loans from the company, which are all now paid back. Curious timing and curious that it didn’t describe what the loans were for. Potentially taxes for equity awards/vesting, but unknown.
III. The Real Narrative
It’s helpful to summarize some of the problems we are seeing before going into details of each one. Below we will give our rationale and narrative to the facts we’ve stripped out of the S1.
- Snap is not a “camera” company.
- Snap’s cost center over the next 5 years is Google Cloud video bandwidth.
- The product innovations came from acquisition, not from internal R&D.
- The shares you can buy on the open market do NOT come with any voting power.
- The executive staff has been taking out large multi-million dollar loans against the cash provided by their investors.
If Snap was really a camera company, they wouldn’t use DAUs as their main metric, especially when this metric is flatlining. They would use number of times someone is using the camera and for what purpose. They would take about engagement with the camera rather than the people using it.
Snap’s biggest cost is video bandwidth. That makes them an online video company. And because it’s social media content and not premium content, they’re using AVOD (advertising) rather than SVOD (subscriptions like Netflix). And because they monetize using advertising, it means they need to continue to grow users. So unless they can do that (and it grows because it’s a social network, not because it’s a camera), the stock won’t rise. Instead, it will fall.
It’s a bit like saying Instagram is a camera company because its product focuses on photos and videos.
Snap is a social media company monetized through ads. They are Facebook with significantly less users and products, a less efficient advertising system. It’s just the bankers don’t want you to compare it to Facebook, their direct competitor for their users (i.e., Instagram).
There’s a difference between what you want to BE & what you actually ARE. You can’t bullshit the general investing public when u lose $0.5B. They’re reaching the same ceiling that Twitter reached. Can’t cross the chasm of usability into mass global market. Incidentally, their results look much like Twitter when it IPOd.
I saw someone wearing Spectacles at Bubby’s in the Meatpacking district of NYC during brunch last Saturday. And I’ve gotta be honest, they looked a bit silly. Not an aspirational product by any means. I don’t see them gracing the cover of Vogue on the face of Beyonce.
The closest the tech industry has come to luxury is Apple’s Hermès partnership. But you’ve still got a big black watch face when it’s powered off that looks pretty bad on the wrist. It isn’t the same horological porn that we’re used to with Hodinkee.
Snap is unusable for anyone but teens, and a much bigger social network has their features. Which makes me question the long-term viability of their product, user base, and abilility to generate advertising revenue from there. Where’s their defensibility as its users age?
You’re not a camera company when your biggest cost is bandwidth. You’re an online video company with a big audience. Snapchat should really be compared to Netflix, except the former uses an AVOD model and the latter uses SVOD. It’s the difference between social and premium entertainment monetization. Nobody is going to pay $10/month for Snapchat. They even say their users wouldn’t buy lenses, their most popular product by far.
Users don’t purchase social media content. The only way to monetize it is ads.
In regards to their product, they had to acquire some of their most innovative features. Spectacles were the result of an acquisition. So too their machine vision, universal search, and lenses technology, in addition to their bitmojis. So, if they don’t have the capabilities to innovate in-house, it means they need to keep generating enough cash to keep purchasing it. Will they if their user base is stagnant, gets older, and stops using the product?
It’s like saying you’re going to invest in Apple because of the iPhone if Apple acquired all of the component pieces of the iPhone instead of concepting and building it themselves. A bit of a stretch? Sure, but it doesn’t mean it’s wrong.
Facebook and Instagram are becoming Snapchat much quicker than Snap is becoming Facebook.
The multi-million dollar loans are troubling. I would hope it’s to help pay the tax burden of equity vesting, but if it was the S1 likely would have said that. Instead, it’s silent. And the loans were likely outstanding for some time until the bankers say, “You have to pay these back ASAP”. Evan bought a $12 million mansion over the summer. I’m guessing that might be part of it.
IV. Should You Buy Shares of Snap?
Because I have a feduciary duty to The Base Code’s philosophy and people who trust in my opinion, I cannot in good faith give Snap a buy based on my experience in the technology industry, running part of a global online video company, founding companies of my own, and generating outsized investment returns.
I don’t feel confident that they have a product built for the long-term, or one that can cross the chasm of global users and ultimately compete as a social network against Facebook and Instagram. Because they’re not a camera company, as much as they would like to have you believe that. They’re a social network.
And when your value as a social network comes solely through DAU growth, but you’re not growing as much, then you’re hitting a ceiling of value.
The Spectacles launch was a great marketing ploy to help distract from that, and give them another product to attempt to get some growth out of. But a small hardware launch is one thing. Transferring that to mass manufacturing at Apple’s scale is totally different.
Now, don’t take this to mean that I don’t want Snap to succeed. I very much do. Their success benefits the startup community tremendously with new entrepreneurs and investors infusing new cash into the ecosystem. But it’s really, really hard.
For them to come up with another, more innovative product is going to take years. And by my calculation, with the money they will raise from the IPO, they’ll have about 7 years of life, give or take, to make something happen.
But, like GoPro, that’s just cash in the bank. It doesn’t mean it’s guaranteed that people will still be bullish on the company or the product that far into the future.
Your Recommended Reading
- Transforming the Stock Market Into a Game
- Comparing Snapchat’s New Glasses To Apple’s & GoPro’s
- The Future of Instagram & Snapchat Stories
- Snapchat’s the New Groupon
- Introducing Snapring
- 24 PDFs from Vidcon 2016
- The Future of Video Advertising Online
from Stories by Sean Everett on Medium http://ift.tt/2jKSWVV