My Analysis of Snapchat (NYSE: SNAP) – a long term bet on innovation

by chadlad101

Hey everyone, here is my take on SNAP (NYSE). Pls let me know your thoughts (supporting/ conflicting) etc. or if there’s anything else I need to cover. This is just my opinion of the stock and I could definitely go into way more detail…

🔥 Investment Thesis

  1. Snapchat has the potential to become the first Western Super App
  2. Snapchat is a bet on innovation, and that innovation wins in the end
  3. Snapchat is leading the way with augmented reality and is a long-term hardware play

(1) Snapchat has the potential to become the first Western SuperApp

  • On June 11th, Snap announced Minis. These are micro applications that third-party devs build for people to use inside of Snapchat.
    • Snap is starting with 7 Minis with some big partners including Headspace (meditate with friends) and Coachella (coordinate your festival line-up with friends).
  • We can look at the success and misfortunes of other companies who have launched micro applications to see if this is a good move for Snap:
    • Bull Case: Snapchat replicates WeChat’s success with Mini Programs
      • Mini Programs launched on WeChat in 2017
      • By August 2019, there were 2.36 million WeChat mini-programs
      • In 2019, over 300 million people had spent a collective $115B through WeChat Mini Programs
      • Chinese research agency Kueclub and Tencent Research & Development found 40% of 8000 research respondents believe they will completely replace standalone apps one day
      • Since announcing WeChat Mini Programs in December 2016, Tencent (owner of WeChat) stock has increased over 130%
    • Bear Case: Snapchat follows the sad path of iMessage apps…
      • These are small apps that you can access through iMessage on iPhone
      • Developers seemed to lose interest in 2017 after 6 months.
      • Hasn’t grown much beyond Sticker packs… and certainly nowhere near as big as WeChat Mini Programs
  • My Take:
    • Evidence of Success: Snap has killed it since opening its platform up to developers. Out of 800 apps integrated with Snapkit, 20 are in the top 100 of the app store at the moment. Snap Games have also seen a successful start with over 100 million users since they launched last year. I expect similar success for Snap Minis, and ultimately for them to follow the path of WeChat.
    • Snap becomes stickier: If Minis are successful, it’ll make Snapchat very sticky. Why would people leave the Snap app when so many other convenient services are offered on it? Snap previously made their app sticky with Snap streaks, and now they’re going to make it even more so with Snap minis.
    • Growth opportunities: If everyone is using Snap Minis to plan, shop, and socially book tickets together, non-users will be persuaded to download Snapchat to access these programs specifically.
    • Revenue diversification: Snapchat has a huge opportunity to diversify revenue beyond adverts and brand partnerships, by taking a cut of revenue spent through e-commerce Snap Minis (see above: $115BUSD spent through WeChat mini-programs in 2019).

(2) Snapchat is the most innovative social media company

  • This is pretty clear from all the news articles released about Facebook copying everything Snapchat does
  • Snapchat was FastCompany’s most innovative company of 2020… a list that also placed Tesla, Shopify, Beyond Meat, and Spotify in the top 15.
  • It’s worth reading more about this here

(3) Snapchat is leading the charge with Augmented Reality and is a long-term hardware play

  • Leading the charge into Augmented Reality:
    • According to Mordor Intelligence, the Augmented Reality market is expected to have a CAGR of 152% between 2019 and 2020, and the user base for AR technologies is also expected to grow beyond 1 billion by 2025.
    • Researchandmarkets.com is more bearish, estimating the size of the AR market to only grow at 44.74% (still ridiculously high) to USD 27.44 billion by 2025, up from USD 2.98 billion in 2019.
    • Snap is positioning itself to take a large proportion of the consumer-facing AR market.
      • More than 170 million people use Snapchats Augmented Reality tools daily
      • Snap recently announced an AR tool called Scan that allows people to digitally interact with anything they see with their iPhone camera
    • Snap was rated as the #1 most innovative VR/ AR company of 2020 by Fast Company, and if they can use this to capture a large proportion of the consumer AR market (27.44B in 2025 – see above), their revenue and valuation could be off the charts in the medium – long term.
  • Long-term hardware play
    • Following the iPhone and subsequent Android smartphone releases in the past decade, AR glasses have long-believed to be the next major hardware step in computing that will change the way we interact with the world
    • Evan Spiegel (Snapchat CEO) believes we are unlikely to see mainstream AR glasses for another 10 years
    • In an interview, Evan Spiegel stated
      “Spectacles, because they’re a new type of camera, they’re still event-based in terms of usage. You go on a really cool trip, you’re playing with your kids, whatever it is — and you want to represent that moment in a totally new way, from your perspective in 3D. So for now, I do think it’s going to continue to be an event-based product. But what’s really exciting is that over time, we’ve seen the capacity for these cameras to evolve from event-based products to products that are used all day long. So, I think we’re just on that journey with Spectacles. And we’re fortunate that we can continue to invest along that path to get there.”
      • While open to interpretation, this could mean that Snapchat is investing in Snap Spectacles, with the aim they will eventually become AR glasses armed with Snapchats AR software to compete with Apple’s much-anticipated equivalent.
    • EVEN MORE INTERESTING: On top of Snap’s augmented reality software capabilities, Snap has also announced voice-enabled lenses called Voice Scan. This is similar to Apple’s Siri or Amazon’s Alexa.
      • Voice could potentially be used as a control-mechanism for AR glasses later down the track
    • My Take: AR glasses seem to me like an inevitability, however, whether or not Snapchat create them is a pretty huge speculation. However, the upside of this speculation could be ridiculous. Using the case of Apple and the iPhone as an example:
      • There are currently 728 million iPhones in use around the world
      • When Apple announced the iPhone on the 9th of January 2017, its stock price was $11.94USD. Since then it has appreciated over 2500% to $352.08USD. Apple’s market cap was less than $80B when it announced the iPhone, today it is $1T.
      • If AR achieves a similar reach, then the dominant AR hardware company could see similar success to this.

👎Risks

No investment is without risks.

  • Many people believe Superapps will fail in the Western world, so Snapchat Minis won’t succeed in a big way.
    • Western world and Asia do have incredibly different internet ecosystems with China effectively jumping straight to mobile
    • Snap has had recent success with its Snap Kit and Snap Games, however, only time will tell
  • Snapchat is dying and will be replaced by the next social network
    • Snap still reaches more 13-34-year-olds in the US than Facebook or Instagram. It also reaches more users in the US than TikTok and Twitter combined.
    • Snapchat growth has significantly underperformed Instagram. However, it would be worth to look into where the growth comes from (age and country demographics).
    • It is entirely possible that the next social network could be built on top of Snapchat (HoopWinkYOLO are some of the fastest-growing consumer apps and are all heavily reliant on Snapchat)
    • Snap isn’t afraid to acquire the next social network, having previously acquired Bitmoji and Zenly
  • Snapchat has Facebook copying everything they do
    • Evan Spiegel doesn’t seem too worried about this so long as Snapchat remain innovative and ahead of the park
      • “If you can create something that is so beautiful and simple that the only thing other people can do is copy it exactly, that is the most fantastic feeling. It is the most fantastic thing in the entire world.”
  • Snapchat won’t become profitable
    • One of the biggest tests for Snap will be figuring out a monetization model beyond advertising. No one has cracked this outside of China yet, and Snap’s messaging network of close friends makes it possibly the best positioned to do so.
  • Snap spectacles suck..
    • They do suck, but as mentioned above they could simply be a step in the process of getting to full AR glasses.
  • Snap is already huge ($23B company), it won’t grow much more
    • Snap has the long-term potential to be the size of any of the top consumer tech companies. Apple $1.47T (51x Snap), Google $964B (33x), Facebook $653B (23x) and Netflix $184B (6x).
  • Before investing, make sure you read Snapchat’s prospectus and yearly reports to see more risks.

Current valuation

  • Amongst the 35 analysts that cover Snap, the average target price is $18.66
  • At the current price, the consensus is Snapchat is marginally overvalued. However, with plenty of positive information being released at the Snap Partner Summit, this could change when analysts next update their ratings.

Conclusion

  • Worth digging deeper if you’re a patient investor, looking to buy and hold for the long-term (minimum 5-10 years)
  • Could crash again like in 2018 if Snap fails to execute mini-apps etc. or if young generation has a fundamental shift to another social network
  • Disclosure: I’m long SNAP through underlying equity, but not that long… it represents a very small proportion of my overall portfolio. Everything expressed in this newsletter is personal opinion based on personal research. I’m not a trained professional nor a financial advisor, and this is not a suggestion or recommendation as to how to handle your money. Make sure to always do your own due diligence. I shall not be held liable for any losses you may incur for investing and trading in the stock market. Be careful my dudes and don’t buy short-term call options on SNAP – this baby is a long-term play.

🔗Links and resources

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.