In my previous Snapchat article (NYSE:SNAP) I pointed out that Snapchat's 35 and older user base was relatively small and that they are going to have trouble attracting and getting similar engagement from this older age group. This got me thinking about the "what if" scenario where that age group really did start using Snapchat in a significant way. It wasn't hard for me to imagine that transition on Facebook (NASDAQ: FB) or Instagram as I predicted early on that the mothers of the world would use those platforms as the modern day photo album to catalog photos and videos of birthdays, family vacations and everything in-between. Little did I know that it would turn into the biggest and most passive aggressive game of one-upmanship from middle aged women mankind has ever seen while also becoming the virtual knitting circle they go to and gossip about their children's teachers and plan birthday parties. Let's face it, Facebook is as useful as it is addictive. It's a multi-purpose platform that serves as an endless virtual photo album, a news aggregator, and the most efficient way to socialize and stay connected to the most amount of people with the least amount of effort. I, like many others before me have managed to escape the virtual cult and deleted my account only to make my inevitable return. As we shamefully re-enter, Zuckerberg hands us our old familiar hooded Celtic robe and our old goblet (our previous Facebook account, just the way we left it several months back) and says in his soft nerdy voice "I knew you'd be back"
I can envision a scenario where a large percentage of the "35 plus" age group is dabbling in Snapchat, maybe even becoming daily active users ((DAUs)) but they won't replicate the voracious Snapchat apatite like the teenagers who will send a blank Snap of a brick wall to their friends just to keep a 156 day Snap-streak alive. Don't believe me? Just ask the teenagers in your family about their longest snap-streak and let me know in the comments section. I think I once hit a streak of 3 days, not impressive, I know. And like the teenager's infatuation with Snapchat the middle-aged adults all over the country have the same level of infatuation with Facebook.
But still, I wanted to explore the "what if" scenario more. Fellow Seeking Alpha contributor Alex Cho (who I respect as an analyst but think his bullishness on Snap is unwarranted at this stage in Snap's evolution) takes the view that the 35 - 55 age group is coming to Snapchat "in droves", he sees this as a bullish sign for the stock (you can check out his article here). He displays a graph (source JPMorgan) that shows a 301% y/y growth albeit the graph indicates the growth is actually decelerating. This year-over-year growth percentage of 301% is a bit misleading as we don't know the nominal base it's being calculated on. Understanding the nominal base would paint us a much clearer picture.
Next question, if the older generation is in fact, actually coming to Snapchat in droves is this a good thing? Snap's main competitive advantage is that it's still considered "cool" by teenagers and they can generally post freely without worry that a parent or teacher could see their mischievous behavior. If we use history as our guide, trends that our parents adopt quickly become "un-cool". I discussed this scenario with a friend who has a few decades of professional investment experience in the tech sector, this person summed it up nicely by saying that it would be the "kiss of death" for Snapchat. Snapchat, you might be damned if you do and damned if you don't in this situation.
What does this amount to on a net basis? Is snap going to lose a teenager for every mom or dad that signs up? No, I think DAUs will continue to grow slowly but I'll be paying attention to the engagement metrics, "time spent in app", "times opened app daily", and "snaps created daily by users". Snap did recently add a feature to allow users to block certain other users from viewing their story, this tells me they are aware of this risk also. This "adult-blocker" (I'll coin that phrase) feature might be what saves Snap from an early demise.
Dis-Economies of Scale?
Something that caught my eye from Snap's S-1 filing was the incredibly low average revenue per user (ARPU) in the other two categories that weren't North America. In the "rest of the world" category the ARPU in the most recent quarter was $0.15 (compared to $0.28 in "Europe" and $2.15 in "North America"), combine that with the high cost associated with cloud computing data storage and it immediately makes me wonder what the average cost per user is. I'm not sure if it's material but, is Snap losing money on every new user from some of the low value markets around the world? More importantly, will user growth in these regions drag down this closely watched ARPU metric at a time when analysts and investors are expecting this metric to increase 10x along with a 2x increase in DAUs?
Ad Model Effectiveness
I've been a Snapchat user since early 2013 and Snapchat started showing ads on it's platform at the end of 2014, I have yet to watch a single ad on Snapchat for more than a second as they make it very easy to skip with just the tap of a finger. Does anybody actually watch these? Is it always going to be this easy to skip them? maybe not but with the short attention spans of their core age group engagement could decrease if they stopped allowing us to skip ads. On the flip side they might be able to charge a premium for the ads that are watched in their entirety or even halfway through as they could feel fairly certain the viewer was engaged with the ad. What about a pay-to-skip option? I'd be happy to pay a few dollars a month to avoid ads if they didn't allow us to skip them so easily but I think I'm in the minority of people that would pay for this and it could open the door for competitors (Zuckerberg or newcomers) to offer an ad free version. To illustrate this point , users even refused to pay for Snapchat's most successful product "Lenses", the feature that turns you into a little dog face that licks the screen. A fun and silly feature that is constantly used but hardly anyone was willing to pay for it so they quickly made it free to use.
Augmented Reality And The Zuckerberg Threat
In my previous article on Snap I discuss in length how significant a problem it is to have Mark Zuckerberg as your main competitor. In the weeks following my article, Zuck had announced that Instagram's feature "Stories" (a copycat product of Snap's core product) has surpassed Snapchat's daily active user count with 200 million vs. Snap's last reported count in February of 161 million. An out of character move for Zuckerberg that appeared to be a direct shot across the bow of Snap. Instagram's Stories, which was released in August of 2016 has been a major concern for Snapchat and now we know why. If that wasn't bad enough a few weeks later at Facebook's F8 conference Zuckerberg told the world he is shifting his focus to augmented reality, virtual reality, and video communications. He went on and on about features and products that sounded eerily similar to Snapchat's, if you squinted your eyes just enough you could have easily mistaken it for a Snapchat conference lead by Evan Spiegel. Also, Zuckerberg said he would be open sourcing his augmented reality software development, a stark contrast to Snap's commitment to keep that work in house. Historically opensource software products and tools are better and more on the cutting edge of innovation with the downside of not being able to profit off them. In the early 2000's there was a big debate on open source software where Microsoft was openly anti-opensource and Google (NASDAQ: GOOG) was very pro opensource. The product innovation that followed should help paint the picture here for anyone that doesn't already know how that decade ended for those two tech giants. Zuckerberg could be taking a page from Bezos', the CEO of Amazon (NASDAQ: AMZN), book on this one and sacrifice the ability to monetize the AR software on the front-end but provide a better user experience and capitalize on the back-end as the user spends more time on the Facebook platform.
On a positive note, I was intrigued to see that Evan Spiegel hasn't sold and doesn't intend to sell a single share of SNAP. That indicates to me that he might have a surprise for us, that surprise could be more rhetoric about the future of Snapchat or real substance pertaining to the present but in this market it doesn't really matter. Rhetoric effectively sold to the masses is worth considerably more in terms of market capitalization. Don't believe me just take a look at Jim Chanos, the famous short seller, He's been shorting Tesla (NASDAQ: TSLA) for years based on the fundamentals and in that time Tesla has been on an upward tear as the market isn't valuing it on traditional fundamental metrics, right now Elon has been given immunity from the investment community as Telsa is being valued on a different set of metrics and the future vision that Elon has sold to investors. If Spiegel can do the same Snap's share price can certainly go higher.
I'm not bearish and I'm not bullish, in fact I'm looking for reasons to go long SNAP since shorting at these levels doesn't make much sense, your upside is capped and your downside is unlimited, never mind the type of market that we're in, the high cost of borrowing shares and the small share float. The asymmetric opportunity will be to the upside if it ever presents itself and that's how I like to invest. The Snapchat short sellers keep citing a weak business model but what they fail to realize that the business model can evolve quickly. Believe it or not, amazon.com used to be an online book store and Just last week "Snapchat TV" was announced, not a huge surprise right now (as I talked about this in my previous article) but 18 months ago nobody saw this coming and 18 months from now there can be several more products we couldn't anticipate.
Q1 Earnings Release and Conference Call
Snap's Q1 earnings release and conference call will be held on May 10th after market close. I would normally expect a few quarters of good numbers and news pre-packaged and ready for delivery after such a high profile IPO but in this case I'm not so sure if they can meet investors high expectations. Either way I think the real fireworks will come during Q & A and management's forecasts.
What I'll Be Looking For In The Upcoming Call
- More color around Snap's ad model and it's effectiveness
- Expenses related to user growth (specifically in the low value regions)
- Engagement metrics
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.