6 Considerations when buying Snapchat stock post-IPO
Snapchat is going public. As far as consumer technology IPOs are concerned, it’s a short list of scaled social applications that have been able to tap the public markets…but those that have, have been generation defining companies, achieving market caps in the tens, if not hundreds of billions of dollars post-IPO. The list is short indeed. It goes: Facebook, Twitter, Linkedin…that’s kind of it (tell me what i’m forgetting, if I have). You can’t swing a dead cat these days without hitting a social app in the Appstore, but those that achieve true, sustaining scale…that capture an enduring relationship with their user base, and that have the potential to say reach billions of people…the air is quite thin. These companies are important because they represent attention…they are part media company, part publishing platform, part social network…they are where large amounts of consumers spend their time, and that time is obviously valuable…to advertisers…to companies…to anyone who wants share of wallet.
Here are some things to think about when considering a purchase of Snapchat stock:
1) Brand: There is a lot to like about Snapchat for a day 1 buyer post-IPO. It is undeniably where the post-FB generation is expressing themselves, communicating, and frankly identifying. The brand is epic…Snapchat can’t make a move that is uncool…and there’s something to be said for that. That was not true of FB, Twitter, or Linkedin…for a long time it was true of Apple (which although not a social application company, is a good example of the power of brand). From an investors standpoint…brand is valuable and difficult to quantify, but assume there’s some upside here relative to what institutional investors are modeling.
2) Growth and user engagement: I haven’t dug into the numbers, but i’m sure they are staggering. As consumer apps go, i’m sure Snapchat will shine on metrics…as far as day 1 investors are concerned, i’d assume that these metrics will be fully recognized and valued by the instiutional money that drives the public markets. Investor have had enough time to understand how to value social applications at this point (which was not the case in the early days of Facebook’s and Twitter’s public lives)…so I’d assume there isn’t a lot of upside in unique understanding of Snapchat metrics…net-net no upside…everyone is going to be looking at the right numbers and understanding them…
3) Except: is Snapchat a social application or a modern day cable company (i.e. a platform where people consume 3rd party content and media)? this is an existential question Twitter has very publicly grappled with in the public markets. Twitter was constantly trying to tell the story of the lurkers and logged out users…consuming media on the platform but not being social…explaining that active users were more than just people who tweeted or even logged in…but the market didn’t know how to evaluate them…and frankly still doesn’t. Snapchat has some elements of this as well…depending on whether you are looking at their chat and user stories features (most valuable), or their Snapchat Discover feature (where publishers like Buzzfeed and ESPN reach Snapchat users)…there are sort of two stories being told. One is “evaluate us on our social activity”, and another is “evaluate us as a pipe for 3rd party content”…and both can be valuable, but only the first can be $400B market cap valuable…even Time Warner Cable is only valued at $68B last i checked…of course there is a symbiosis that social apps and modern cable companies experience…best realized in the form of Facebook today…and there’s a reason that the two go hand in hand…but explaining this nuance to the public markets is difficult…and i view some risk and market acceptance and understanding of “what is snapchat?” should the story evolve, or certain metrics outshine others quarter to quarter…from a day 1 investors standpoint, I don’t think this is an immediate negative…because i think the promise of being the next Facebook is what will drive early speculation in the stock…but 12-24 months out I can see this story being complicated to communicate.
4) On being the next Facebook: This is really where the action will be early ideas. Can Snapchat amass the next 2 Billion people…younger people…not living their lives on Facebook yet or maybe ever…is Snapchat where they will spend a similar amount of time and energy? I see no reason why the answer can’t be yes…and i think that’s the bull case…but there are some existential threats to the bull case that are worth noting…one of the biggest, i believe, is that Snapchat has taken a relatively isolationist approach to building their application and company. They have not opened up to 3rd party development at all so nobody else is (legally) building businesses or apps on top of Snapchat). They have taken a very controlled approach to opening up to outside publishers and content creators. carefully curating who gets to show up in Snapchat discover, and what type of content they can and should create for Snapchat. And they have done nothing to spread their tentacles across the open web. There is no Snapchat like button. No share to Snapchat. No login to this site with your Snapchat account. No oay with Snapchat…Snapchat is not baked into anything else…and very little else is baked into Snapchat. The positive side of this approach is that they have incredible control and stewardship over the Snapchat experience and brand. The product experience is delightful and unadulterated…and that is reflected in the metrics above…the downside is that Snapchat is not infrastructural in nature…it’s not a platform yet…it’s not an ecosystem…and that means it’s easier to rip out and replace in the world as a whole, than say a Facebook was when it IPOd. Now, the network of loyal users…who have built their identities on Snapchat and creating new social graphs there…that is very sticky…but Snapchat has not diversified it’s touch points to the users or enterprise…it is still subject to the ephemeral whims of an increasingly fickle consumer base with increasingly available alternatives coming down the pipe in the form of “the next hot app, that is cooler than Snapchat.” What this means in practice, is that they can’t ever lose their brand voice, and they can’t ever drop the ball on product…and history would say most other consumer applications do one or both of those at points in their life. When Facebook IPOd i used to try to explain to wall st types that they are thinking about FB all wrong…facebook is a piece of societal and enterprise infrastructure, it’s a platform, and that position is why it’s valuable…it’s not just eyeballs…Twitter had the same narrative available to it, and ultimately squandered it (although i believe that it is still available, and the only interesting investor narrative available at this point actually), but Snapchat does not yet have this narrative. Now maybe it will develop it over time…but today…Snapchat kind of is all eyeballs…and that’s not a super secure place to be. for day 1 investors…if you are long term value investor…this is a negative and one that will not be appropriately reflecting in institutional analysis
5) On revenue and financial opportunity: I haven’t dug in deep here. From afar, it seems that Snapchat is taking a pretty bespoke approach to monetization…and it also seems they are heavily inspired and influenced by the cable television model…I think this will evolve as they need to reach a different scale of revenue…so I wouldn’t really look at today’s business model as the one that will get them to a Facebook sized market cap…Facebook itself didn’t come out of the gate with their killer business model at IPO…the App install add didn’t come for 3 or 4 quarters after IPO, but it was obviously the unit and model that changed the trajectory Facebook’s story on Wall St…and Snapchat doesn’t really have an analagous opportunity visible today. There is no self serve, near-infinitely scalable way for Snapchat to make $ that is visible today…Google has this. Facebook has this…and if Snapchat wants to break into that stratosphere from a shear market cap standpoint…it’s going to need to find something similar…the good news: i think it can. the bad news: hard to see Wall st giving credit for that until it materializes…
6) Overall: I think I’m a buyer in Snapchat at any market cap under $40B…if for no other reason, than that there is no other contender to become the next Facebook…but I do not believe they will get there by being isolationist forever…and I see a fair amount of risk as they are pressed to give up some control in exchange for scale, diversification of touch points, monetization, and infrastructural position.