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Avoid The SNAP Trap

Summary

snap down 40% from IPO open ($25->$15)

major short term problems with user growth, ARPU and competition

don't buy it; more risk to downside

six months ago... on the stock's second day of trading post IPO i thought let's roll some dough. the trade was: hold into the co's first reported earnings mid-may or dump if stock price breaks below $25. since the stock broke $25 that same trading day, i bailed. no new SNAP positions since. radio silence.

NOW LOOK AT THOSE SNAP CRACKERS!! 40% off at $15 a pop. it's time for a snack attack, right? back that truck up like it's hot, right? not so fast al capone! keep your powder dry because it's not yet time to own SNAP.

"Appear weak when you are strong, and strong when you are weak.” - Sun Tzu, The Art of War

you have to wonder... evan spiegel, ceo of snap, bought his employees a copy of sun tzu's "the art of war" after turning down zuck's $3bn offer for his company in 2013. is evan following tzu's playbook or is he marching his company into the land of dog sh*t and banana peels? snap doesn't look strong.

three reasons why snap is still not worth owning...

#1 - slowing user growth hit from three directions... see #s below. IPO and no groh, bro? fine, but what about this current quarter... it's going to pick up right? probably not. it probably gets worse. optics for KPIs, like daily active users (DAUs), are all that matter for a cash burning 'camera company' at this stage: (1) on the aug 10th earnings call management mentioned higher engagement last year this time because of the olympics and US election. definitely big selfie opps that won't be recurring this year. (2) there's also spiegel's 'no growth hacking' manifesto, which seems to be a lame excuse for underwhelming short term results... check the quotes/ evidence below! (3) AND snap is strategically throttling its international growth prospects which would seem to be the lowest hanging fruit for adding new users. why? video is expensive bro.

"There's this thing in our industry called growth hacking, where you send a lot of push notifications to users, or you try to get them to do things that might be unnatural or something like that. And I think while that's the easy way to grow daily actives quickly, we don't think that those sorts of techniques are very sustainable over the long term." - spiegel on q1

"The fact that we don't do growth hacking like modification and things like that..." - spiegel on q2

global daily active user (DAU) YoY growth:

2015: 53%
2016: 57%
1H17: ~20%

more specifically...
3Q16: 56%
4Q16: 46%
1Q17: 28%
2Q17: 17%
3Q17: ?!?!

#2 - lower ARPUs! cheaper ads because long term > short term guyzz... a quote from spiegel below explains why the price to advertise on snap is trending lower in the short term. great evan. not so great for investors looking to judge snap's performance (and stock price) by the current quarter... which is *cough* everyone besides u and bobby.

"Yes. Imran mentioned over 60% of Snap Ads were purchased through our auction, which is more than double last quarter. We believe overall that the transition to a bidded auction is the best way to grow our business over the long-term, but you're right; even though pricing is lower in the short-term, as we on-board more advertisers. I think lower pricing is an important driver of growth at this stage, especially in the short-term because it provides incentives for advertisers to get over the hurdle of having to learn how to use Snap, and given the dynamics that we're seeing in the industry and the marketplace where mobile ad pricing seems to be increasing pretty quickly due to limited impressions, we think that this offering of low prices and high engagement is really attractive to advertisers and, hopefully, as we're saying, will incentivize them to onboard quickly and take advantage of this." - spiegel on q2

#3 - killer feature killer: instagram stories... snap has been first to do a lot of things, including drive user engagement through its once killer feature called 'stories'. it was unique, it was innovative, but instagram copied it a year ago and now boasts impressive growth stats. if we compare both companies on an apples to apples metric--which is DAUs--snap has 170mn, insta has 400mn+. given most of snap's users engage with stories because it's native to the functionality of the product, let's say its 100% of users so 170mn. but insta? 250mn daily users on stories. MORE THAN SNAP!! and for more salt--Delmondo (social media analytics) measured a 50% decline in snap story engagement since last year. ouch.

NOW, maybe this simple apples to apples comparison is *too* simple. maybe there's a bigger picture: we might be comparing granny smith to red delicious, and both apples clearly have rightful places in the produce section. maybe it's a little more complex:

for instance spiegel could argue... instagram's platform is more about 'consumption' whereas 60% of snap users create content (a rate that is multiples higher than any other social platform) and therefore snap stories are more engaging so it's worth more to advertisers. the average revenue per user (ARPU) opportunity is richer for snap bro.

but zuck could counter... instagram (facebook) copied snap's key feature with incredible success and speed. and keeping in mind that facebook will generate more free cash flow THIS YEAR than the market cap of snap today... how could snap possibly sustain and build its innovation moat while enduring crushing server and R&D/ admin costs that drive cash flow losses for years and limit user growth. and by the way, who would want to be paid in snap equity right now, evan? it seems like your employees rushed to cash out after the first lockup expired... just sayin'

if you've made it this far, thanks for reading. stay tuned... SNAP shares are likely to be upside-capped until the company management can find a way to address the three issues above. resistance likely at the $17 IPO level. downside to $10 (will write a follow up if this is of interest). more risk to downside. keep in mind short interest is now 17-20% of float (2x higher than FB at a similar time post IPO); while a squeeze is always possible, the short interest does seem to show a growing conviction in its trend since IPO. lastly, snap should have low risk of takeout... founders control the vote and they turned down FB once and rumor has it google too pre IPO for $30bn. woof. stay safe out there.

what do you think?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.