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James Godbout
James Godbout
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Summary
Despite having a strong product, Snapchat faces serious headwinds.
The current valuation implies that these headwinds aren't priced into the market.
It is likely Snapchat doesn't justify its valuation and disappoints investors.
Introduction
As Snapchat (NYSE:SNAP) IPOs, it's clear the company has quite a few advantages. Specifically, it's a great product with very strong engagement and user growth. Of course, three years ago this was exactly what people said about Twitter (NYSE:TWTR). Since then, Twitter has struggled to monetize its user base and its user growth began to slow. As such, the stock is worth only 1/3 rd of what it was worth at its peak, and 1/2 the valuation of Snapchat post-IPO. While Snapchat's co-founders have wide ranging visions for the company, when reviewing the S1 and the competitive landscape, it became clear to me that they face many of the same challenges as Twitter. Ultimately, I believe these challenges will weigh on Snapchat's premium valuation, and investors will find snapchat performing closer to Twitter than Facebook (NASDAQ:FB) over the next 2-3 years. (Author's note: unless otherwise stated, all information about SNAP is pulled from the S1).
SNAP's Product and User Growth
Snapchat's product is very strong, and does give the company some advantages in its competitive market. The product is well optimized for user engagement in terms of finding that "magic moment," or that point in time where users realize the value a product can provide in their lives. Snapchat is unique in that this moment can vary by demographic. Younger users likely find this moment when playing with geofilters, while older users may have the moment when exploring snapchat publishers and interacting with their favorite brands. Either way, Snapchat's product is optimized so all demographics can find these moments relatively quickly. This product optimization has let Snapchat build very strong user engagement.
It's interesting for investors to note that Snapchat has chosen to focus on Daily Active Users ((DAUs)) as its key metric for engagement. DAUs is growing strongly, and I agree with management that it is the most relevant metric for the company and investors to follow as a performance indicator. Unlike a platform like Facebook, where users are likely to spend 20-30 minutes in one sitting, Snapchat is likely to be used by consumers in short frequent bursts; this makes the DAU metric more relevant than Monthly Active Users ((MAUs)) because it more accurately captures this style of engagement. Indeed, this is one clear differentiator between Snapchat and Twitter - despite its similarities to Snapchat, management focused more on MAUs. I believe this mistake was a huge reason why Twitter's management didn't recognize deceleration in user growth and engagement early enough to address the problem. Even today, Twitter still does not report DAU numbers, and it is hard to know just how engaged the user base is. It's also interesting to note that Twitter management may have recognized this issue, as in its last two quarterly reports Twitter has begun highlighting DAU growth, which is now back to double digits. Like Snapchat, this should be its its focus.
http://seekingalpha.com/article/4051684-oh-snap-stay-away-ipo
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