Thoughts on the Snap IPO

Professionally I don’t get too excited about consumer technology IPOs, but I sometimes find myself entrapped, following certain consumer names for personal reasons. Snap is my current haunt. Snap has been a fun saga to follow and experience. I went from skeptic, to Snap user, to Facebook Stories user, and now back to being an avid Snap user (for good). I used to live in Venice Beach and skateboard past Snap’s first office before Snap was Snap; my old boss is now Snap’s #3 exec; and I constantly toil with wrapping my head around the sheer size of the opportunity around this company (it’s a big one).

For all of these reasons, I wanted to put my brief thoughts down on paper to hold myself accountable and to share some insights with readers. For full disclosure, I am not buying IPO stock, I don’t own any stock, and this is not investment advice (see disclaimer below). This is just my initial set of high-level thoughts to focus in on what I believe are the key issues. If you want vast reams of analysis, metrics, and fun with numbers, I would point you to Snap’s S-1Goodwater Capital’s review, RetailRoadshow, or here, here, and here. Lastly, apologies for the poor grammar below; I am in heavy GSD mode these days due to my two start-ups (family and company).

First, to put Snap in context relative the evolution of media broadly, I recommend reading this Stratechery post by Ben Thomson (see last graphic for punchline, but I think the whole bit is pretty fascinating). With this as the backdrop, below are some things that I think make this company interesting to follow. This says nothing about the stock, because for that you would actually need to do a valuation (and your own judgment). For a valuation, I would just point you to THE MAN at this stuff, Aswath Damodaran. His valuation posts are always fantastic, and this one on Snap is no different.

Highlights

  • Secular: Cannibalizing time spent on TV, radio, and other forms of media. See Stratechery article above for context
  • Product: Focus of firm is on engagement, not total users strictly (i.e. they would rather have people that interact with a handful of family members every day than people with 1,000+ “friends” that use the service monthly). This seems like is a positive for sustainability vs. the typical “user land-grab” approach
  • Product: Empower professional content providers (e.g. National Geographic) to curate which stories are displayed to return editorial power to content creators. This was intentionally done to get away from the linkbait evolution of industry (e.g. WSJ reading experience vs. Facebook reading experience). I believe, this is a big long-term advantage and seems like quite a moat if curators invest heavily in time and content here (sticky and perhaps mutually exclusive approach)
  • Ad Units: Video ad units that play with sound. Because the product is natively video with sound on, like TV, Snap is able to deliver high-caliber voice-on ad units comparable to those produced for television. This, I believe, is unique relative to other online options that are annoying (website video ads and Youtube ads), and this could make Snap a viable TV ad spend alternative for Madison Ave (massive budgets)
  • Platform Approach: They are squarely going down the Google/Facebook strategy of: (i) Ad products (units), (ii) Targeting, (iii) Measurement, (iv) self-service (SMB) + enterprise sales. This approach coupled with the TV time/ad spend TAM could put them alongside the two-horse race for online (specifically mobile) ad spend led by FB and GOOG today
  • Team: To be honest, I didn’t know where to put this one. I have heard mixed things secondhand and I am not close enough to have an informed point of view on the “squishiest” part of investing. So, I’ll put it hear and leave it at that.

Issues (admittedly haven’t spent enough time here)

  • Valuation: Fundamental value relative to market value assessment is, I believe, the key issue here. If the stock halves, I might take up this work. In the meantime, Damodaran’s view is a useful proxy.
  • Gross Margin: Negative to slightly positive. Issue looks to be driven by their Infrastructure-as-a-Service (i.e. AWS, Google) spend. Would expect significant increase and scale as they increase revenue. I’m sure the investment banks had to diligence this hard otherwise they likely couldn’t underwrite this IPO. However…! I would imagine there is a variable component here and the fact that its so low is concerning relative to long-term model. A better analysis of long-term margins could be helpful
  • ARPU: If user growth slows (could take a long time given DAU vs. TAM), it seems like this whole story is going to hang on ARPU growth, which will be a function of ad loads, assuming current business model. Snap ARPU is $1.05 today (up 3.4x), yet FB is in the $20 range (have heard $50+ in U.S.). Upside analysis required here
  • Moat: How competitive is this given FB’s installed based and competitive Facebook Stories offering? Tough to say, but I believe Snap is probably more defensible than consensus believes given that Snap’s DNA is spontaneity, while FB/Insta are strictly “best possible curated views of oneself”. These DNAs are at odds, and seems like market success to make this hole thing really work (to steal that “TV downtime” in one’s day — see Stratechery post above) relies on a low-level of intellectual engagement (like watching junk TV)
  • Voting Rights: Snap’s stock structures have been some of the least investor friendly that I have seen over the years (but perhaps for good reason according to this New York Times article). IPO voting rights are no different.
  • Secondary Sales: Things are still fluid, but there looks to be a large secondary component in this deal. In fact, for plain vanilla Tech IPOs, it is looking like one the largest I have seen this Fitbit IPO in 2015

This post is for informational purposes only. It is intended to help readers think about Snap in greater detail. This does not constitute investment advice or any offer to provide advisory or management services and is not affiliated with my employer in any way.