Google – Thrice bitten, never shy.

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Fourth time unlikely to be the charm.

  • Google has announced a partnership with HTC that sees some key engineering talent join Google but it remains a complete mystery to me as to what Google is paying money for.
  • This will represent the fourth major hardware related transaction that started with Motorola Mobility and continued with Nest and Dropcam.
  • These deals all had two things in common.
    • First: All of the acquired companies have felt great discomfort being owned by a company that does not really understand hardware.
    • The result was infighting and a failure to use Google’s strengths to increase market share of the products in question.
    • Second: In each case the real beneficiaries of the transactions were the owners of the assets being sold, leaving Google shareholders considerably worse off.
  • Even with highly hardware-experienced management, these assets have struggled to perform, leaving me with the impression that just being inside Google is enough to put good hardware people off their game.
  • I think that the case with HTC will be a little different as Google is not buying the whole company but instead is paying for some IP and taking on some engineering talent.
  • This is where I am left scratching my head as on my numbers, HTC’s smartphone assets currently have negative value.
  • One possibility is that Google is simply pre-paying in order to guarantee capacity and resources such that the previous ramp-up problems that occurred with Pixel do not happen again.
  • This will also provide the infrastructure and distribution to produce Pixel smartphones in high volumes, something with which last year’s product really struggled.
  • I do not think this deal is about promoting pure Android as Andy Rubin’s Essential Inc. is already pushing this button with great energy.
  • Hence, I think that this is about bringing smartphone production and distribution to scale and if Google is prepared to be as aggressive on price as Xiaomi, it might just get somewhere.
  • I think that the real risk to this transaction is once again Google’s culture which has made the other hardware acquisitions feel like unwanted orphans that have no business being part of Google.
  • Google has yet to show any sign that it has learned from the mistakes but better late than never.
  • I continue to be pretty ambivalent to Alphabet whose valuation has kept in step with the improvement of its revenues generated by mobile devices.
  • Tencent, Baidu and Microsoft look more interesting to me.

Artificial Intelligence – Dystopia

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Humanity saved by Gordon Moore.

  • There is considerable disagreement over the dangers presented to the human race by AI, but I think that it will be the laws of physics that prevent dystopian predictions from coming true.
  • At the Tech Crunch conference, Google’s head of AI was quick to dismiss Elon Musk’s concerns that AI could present an existential threat to humans or cause a third world war.
  • Artificial super-intelligence is when machines become more intelligent than humans.
  • Top achieve this, computers need to continue evolving at an exponential rate for the next 23 years and three huge AI problems need to be solved.
  • RFM has identified (see here) these problems as:
    • First: the ability to train AIs using much less data than today,
    • Second: the creation of an AI that can take what it has learned from one task and apply it to another and
    • Third: the creation of AI that can build its own models rather than relying on humans to do it.
  • Progress against these three goals is incredibly slow and only the very best companies are making any real progress at all.
  • Everyone else claims to be working on AI but in reality are using advanced statistics to make predictions that have an improved probability of being correct.
  • Even with the best minds working on these, I think it will be decades before these problems are even close to being solved.
  • However, the real reason why I think AI will not overtake the human race comes down to Moore’s Law.
  • If one extrapolates the exponential pace of computer capability over the last 40 years, one can predict that computer intelligence will overtake that of humans by 2040.
  • This is what most of the predictions of artificial super-intelligence are based on and where much of the fear comes from.
  • However, I do not think that the current breakneck pace of Moore’s Law can continue.
  • 10nm is currently the cutting-edge geometry for semiconductors and beyond around 5nm the laws of physics start to misbehave.
  • This means that doubling the number of transistors in the same area of silicon every 18 months will no longer be possible using the transistors we know.
  • It is this doubling that has underpinned the exponential improvement in computer capability over the last 40 years and without it, I think this improvement will slow to a crawl.
  • In order to continue beyond this point a new form of transistor is required which could prove as fundamental a change as the shift from triode vacuum tubes to silicon transistors.
  • Alternatives to silicon transistors are at such an early stage of development that it seems inevitable that Moore’s Law will grind to a halt long before a viable alternative is found.
  • I suspect that this will mean that the pace of improvement of computer capability will also slow down to the point where artificial super-intelligence drops way below the visible horizon.
  • Hence while I think that Elon Musk is right to think that humans are in trouble if machines ever become more intelligent than man, it is so far away in time that Google is also right not to be worried about it.
  • Dr. Moore can be content that he has added saving the human race to his list of accolades.

Google vs. Amazon – Battle for the home pt. IV.

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Amazon increases its aggressive land grab. 

  • Not content to sit on 70% market share, Amazon is aggressively compensating for the lack of Alexa on smartphones by effectively giving the devices away and pushing e-commerce as hard as it can.
  • A land grab strategy makes complete sense because the more Amazon can drive Alexa usage, the more data it will generate and the better it can become.
  • Usage is the key to making all digital assistants better and this is the one area where Amazon has huge ground to make up compared to Google.
  • Amazon has launched yet another Alexa device which costs $20 but this is immediately credited back to the user when it is registered with an Amazon account making it effectively free.
  • The latest addition to the family is called the Amazon Dash Wand which can be used to scan bar codes or Alexa to order products from Amazon.
  • Alexa is present on the device and while this is clearly aimed at driving e-commerce, there is no reason why it can’t be used to answer inquiries or control the smart home.
  • The one thing it won’t do is play music or radio but when the whole device costs $20, it is obvious that the audio experience would not be worth the effort.
  • At the same time, Amazon is also offering $50 off the Amazon Tap reducing the price of the portable speaker to $79.99.
  • The two weaknesses of Amazon in the digital assistant space are that it is inferior to Google and that Google Assistant is present by default on every Android smartphone that ships.
  • This means that if Google can convince users to use their smartphones to access the digital assistant, then Amazon will be at a big disadvantage.
  • However, at the moment over 60% of all digital assistant usage occurs when the user’s hands are busy with another task which obviates smartphone usage as the device almost always has to be removed from a pocket to be activated.
  • This, combined with the fact that Google is still really struggling in the smart home (see here), is why Amazon still has the upper hand which it is showing no sign of losing.
  • This move is clearly aimed at seeding as much of the market as possible before Google can get its act together.
  • If a large number of households have Alexa which is working nicely with the other smart devices they have at home, it will be increasingly difficult for Google to win them back even with a superior product.
  • This is particularly relevant given that the market is still lowly penetrated in USA and is almost non-existent overseas.
  • Given Google’s very slow progress, I am increasingly of the opinion that we are witnessing a repeat of the VHS vs. Betamax battle.
  • I continue not to like either Alphabet or Amazon (even if it wins the smart home) on valuation grounds, preferring instead Tencent, Baidu and Microsoft.

Tencent – Tale of two pies.

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Tencent dominates but still has much more to do. 

  • Tencent already dominates Digital Life in China and now it is increasingly turning its attention to the opportunity overseas.
  • This makes sense as China is starting to show signs of maturity meaning that the recent breakneck pace of growth will inevitably slow down forcing the BATmen to look overseas for more growth.
  • RFM has long identified that ecosystems and smartphone usage in China and developed markets are very different (see here).
  • This means that Chinese Digital Life services are not really relevant in developed markets and visa versa.
  • This means that overseas expansion for the BATmen has to be much more than just attempting to offer their Chinese services overseas.
  • While Alibaba is looking to grow overseas using AliPay (see here), Tencent is focused on adding relevant developed market assets to improve its coverage of Digital Life in developed markets.
  • This strategy has begun with the purchase of Supercell giving Tencent coverage of Gaming but it looks as if Tencent is keen on acquiring other segments of the Digital Life Pie also.
  • Most recently, Tencent appears to have made a move on Spotify that would have given Tencent a very strong position in Media Consumption.
  • Combined with Gaming, this would have given Tencent 40% coverage of the Digital Life pie in developed markets along with the 77% that it already has at home.
  • Spotify appears to have spurned Tencent’s advances, but I suspect that Tencent will continue to look for key strategic assets to improve its position in Digital Life in overseas markets.
  • Currently, Tencent has 30% coverage with Supercell but there is far more to creating a vibrant ecosystem than just gathering assets which provide coverage of Digital Life.
  • The trials and tribulations of Yahoo are all the evidence that one needs to conclude that one cannot succeed by coverage alone.
  • In 2014, Yahoo had 73% (more than anyone else at the time) of Digital Life covered but failed to create any meaningful traction on mobile devices.
  • This is because it was unable to take what were essentially fixed services and successfully leverage them into mobile.
  • Tencent does not have this problem as its traction in mobile is already strong but what it is missing is an understanding of the importance of integration.
  • I have long believed that to be really successful, the different services across Digital Life need to be integrated such that usage can be understood as a profile rather than a series of discrete and independent services.
  • This is one of the key ingredients of Google’s success and is something that Baidu and, increasingly Alibaba, are beginning to get to grips with.
  • Tencent on the hand, appears to be quite far behind in terms of grasping the importance of integration as I still see no signs of this happening.
  • In the short-term this is not a big problem but as Tencent’s valuation continues to rise, it will become an increasingly necessary for Tencent to bring its assets together in a cohesive way to justify its share price.
  • This is how Tencent can really begin to monetise its ecosystem beyond the sale of content and games and become a place where users spend their Digital Lives.
  • In China, some of this is coming through the rapid expansion of WeChat from a place to exchange messages to a place where all sorts of transactions can be executed.
  • However, in the long-term Tencent needs to have all of its services integrated and in that regard, there is quite some way to go.
  • I continue to like Tencent as it is the strongest of all the Chinese ecosystems and the share price still does not reflect all of the potential upside.
  • Hence, there is still not much very downside in Tencent if it fails to integrate its assets.
  • At the same time there is the promise of further improvement in the long-term if it begins to develop its ecosystem beyond a series of very successful but discrete services.
  • Tencent, along with Baidu and Microsoft remain my top picks.

Google Auto – Lyft to market

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Google and Lyft can really help each other.  

  • An investment in Lyft makes a lot of sense given that Waymo’s autonomous driving offering is likely to face a lot of problems getting into production vehicles.
  • Furthermore, with the possibility of autonomous driving being central to its future, Lyft badly needs a solution and the partnership with Waymo puts it in pole position.
  • Google is considering putting up to $1bn into Lyft in a move that would see it become one of Lyft’s biggest shareholders at a crucial time.
  • This is because I see Lyft as still being subscale compared to Uber and when it comes to market places that can be fatal.
  • My rule of thumb for market places is that for money to be made, one player needs to have 60% share or be twice the size of its nearest competitor.
  • In the US, Uber has already achieved this hallowed status and in theory should be able to crush Lyft simply by applying sustained competitive pressure until Lyft runs out of money.
  • However, the current run of bad publicity and executive turmoil has meant that Uber’s eye has not been on the ball and has allowed Lyft to gain some share.
  • Furthermore, the problem that all the ride hailing companies face is that if all cars become autonomous, then their current businesses become obsolete as, while there will be riders, there will be no drivers.
  • In effect one half of their market place will have evaporated meaning that they will become simply a purveyor of a service that requires best in class robot drivers.
  • This is why they must have an autonomous offering as it will give them the ability to migrate from human to robot drivers as the technology comes to market.
  • However, while I see a freight train of electric vehicles coming to market (see here), I think it will be a very long time before autonomy really arrives giving the ride hailing companies plenty of time to fix their shortcomings.
  • From Google’s perspective, I think that it needs to get its ducks in a row now because the advantage it has over its competitors is now as great as it is ever likely to be (see here).
  • It is ahead now but because the technology is likely to be ready before the market is, competitors will have time to catch up meaning that there is likely to be plenty of choice when crunch time comes.
  • By cementing a deal and now an investment in Lyft, Google is giving itself a route to market which the vehicle makers have largely declined to provide.
  • Google’s self-driving solution is by far the best available today but without a way to deploy it in the market, it is useless.
  • This is why an investment in Lyft makes a lot of sense as Uber has already declined to play.

Broadcast TV – Sword of Damocles pt. II.

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The sword has slipped its moorings.  

  • With all of the indicators now starting to turn against the TV broadcast industry even live sports no longer offers any real hope.
  • In 2013 (see here) the shoe was on the other foot where Netflix was trying to do deals with the cable companies to put its app on their set top boxes and be a part of their overall service.
  • What a difference 4 years makes, as Netflix no longer needs the cable companies to improve its reach and combined with Amazon Prime, YouTube, ESPN, NFL, Hulu and so on look set to render them obsolete.
  • The most recent indicators are deeply troubling:
    • First, the Emmy nominations: Netflix increased its nominations from 54 in 2016 to 91 in 2017 putting it in second place behind HBO (111 nominations).
    • Hulu and Amazon were way behind on 18 and 16 respectively but importantly these are orders of magnitude greater than last year.
    • Second, cord cutters: 2m adults in USA will have cut the cable this year up 33% YoY which combined with the younger generation that see no need to use cable brings the total to 56.6m users in the US market.
    • E-marketer forecasts that this will grow to 81.1m or close to 30% of the US population by 2021.
    • Only the over-55 segment is growing in terms of cable subscriptions with all other segments in decline.
    • Third, TV advertising: This has stalled at $71.7bn (e-marketer) after resisting this trend for several years and is expected to decline from next year.
  • These figures make grim reading but I suspect that there is worse to come.
  • These sorts of trends rarely occur in straight lines and the trend over the last 12 months has been one of acceleration which shows no sign of abating.
  • The one survivor is likely to live sports as this is the only media type that loses almost all its value when time shifted.
  • However, there is no reason why this cannot be broadcast over the Internet which is something that ESPN and the NFL have already cottoned on to.
  • Their apps are already No. 3 and No. 8 in terms of MaU on US smartphones for video streaming apps, further undermining what little appeal broadcast has left.
  • These statistics are turning against broadcast much more quickly than I thought they would back in 2013 and I see a real possibility that broadcast is no more in less than 10 years.
  • The broadcasters had an opportunity to deal with the OTT players.
  • Clearly, they should have taken it.

Apple – Worst kept secrets.

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Face ID was the star of a show where everything had been leaked.

  • Apple launched its next series of products that brings its hardware into line with the best of Android but it is in the software where the differentiation will continue to be found.

iPhone X.

  • iPhone X brings Apple into line with Samsung in terms of screen design and quality (OLED) but I suspect it is in Face ID where the real leap in innovation lies.
  • Face ID uses a 3D depth sensor and infrared camera to map the user’s face and then compare that against a previously captured map.
  • Face ID promises to be fast and not fooled by photographs or even 3D models of the user’s face.
  • It will also continue to recognise the user when wearing a hat or glasses or should the user grow a beard.
  • This should be a big improvement on Samsung’s facial recognition which is slow and unreliable to the point where it is often easier and quicker to put in the PIN number.
  • Apple has also redesigned the home button press and multitasking commands into swipes that should be reasonably easy to adjust to.
  • Beyond that there are incremental advances in the camera and image processing but at the end of the day, this device is all about the new screen.
  • Apple has brought itself into line with the high-end of Android in terms of hardware specification meaning that the price premium will be all about the iOS ecosystem.
  • Pricing is in line with expectations at $999 for the 64GB version and I estimate $100 more for the 256GB version.
  • With Android struggling with endemic fragmentation and Samsung remaining very poor at software Apple remains at the head of the pack.

iPhone 8/8+.

  • Many of the improvements present in the iPhone X are also present in the iPhone 8 with the exception of the screen and FaceID.
  • It continues to use fingerprint recognition on the home button and has a slightly improved screen although it is in the old configuration and is not OLED.
  • It has the same photographic enhancements as the iPhone X and represents a steady upgrade to the iPhone 7 with pricing staying the same.

Apple Watch Series 3

  • Apple has recognised that almost all the usage this product is for fitness and is doubling down on this use case in the new version.
  • New functions have been added that improve the performance of the device for certain activities as well as adding some new less common activities.
  • The heart rate monitor has been improved to offer continual heart rate monitoring as well as resting and recovery heart rates thereby deepening its appeal to fitness.
  • At the same time, Apple is taking tentative steps into medical with the launch of a study that looks at alerting users to abnormal heart patterns that can lead to strokes.
  • This is a work in progress but Apple clearly intends to move deeper into this area as it is working closely with the FDA on this study.
  • Apple has also added a modem to one variant of the Apple Watch which I continue to believe is completely pointless (see here).
  • Apple has done enough to keep this category going but the real use case that will make everyone rush out and buy one remains glaringly absent.

Wireless Charging

  • Apple’s new iPhones have glass backs which enable wireless charging for the first time.
  • Apple has backed the Qi standard which is also used by Samsung which I suspect will now ensure that Qi becomes the single global standard.
  • Apple also discussed a proprietary product that enables multiple devices to charge on a single mat but as this is not in the standard it will only work with Apple products.
  • Apple is moving into line with everyone else on wireless charging as even the multiple devices on one mat is not a new idea.

Take Home Message

  • The endless leaks and speculation meant that Apple was not able to spring a single surprise on the audience this year.
  • That being said, I think it has done just enough to keep itself at the top of the industry for another year.
  • This is more about the Android camp struggling with software fragmentation and low profitability than Apple raising the bar for the gold standard in smartphones.
  • The one area where it has raised the bar is FaceID but this feature needs to tested in the wild to see just how good it really is.
  • Apple’s share has enjoyed a great rally this year meaning that the valuation argument for owning the stock long-term has evaporated.
  • With no real surprises coming this year there is a case to be made for taking some profits and looking elsewhere.
  • Tencent, Baidu and Microsoft spring to mind.

Electric Vehicles – Extinction level event.

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EVs could trigger a huge decline in vehicle demand.

  • Vehicle makers are queuing up to announce their commitment to electric vehicles (EVs) but at the same they may be cheering for their own demise.
  • Volvo began it by committing to an EV line-up in 2019 followed by Chinese plans to ban all sales of fossil fuel vehicles and now Mercedes-Benz will offer a hybrid or electric version of its entire line-up by 2022.
  • Unlike the optimists, I do not see EVs as the beginning of a new golden age for the vehicle makers but instead the trigger for a potential collapse in demand from which most of them will never recover.
  • RFM research (see here) has concluded that owning an EV could easily halve the amount of money that the consumer spends on private transportation.
  • This is because:
    • First: EVs should last much longer than internal combustion vehicles allowing them to travel 2-5x more miles than vehicles that use fuel before they need to be replaced.
    • Assuming that EVs cost the same, they will be much cheaper to own when considering the cost to drive each mile.
    • Second: EVs have many fewer moving parts than internal combustion vehicles meaning that there is much less to go wrong and hence they will be cheaper to maintain.
  • Most vehicles are driven to destruction meaning that assuming total miles driven does not increase, a vehicle market that is 100% EVs will be just 20%-50% of the size of the same market with internal combustion vehicles.
  • In USA, this means a market of 3.4m – 8.5m light passenger vehicles compared to the 17m that are sold today.
  • It is important to note that these estimates are extremely sensitive to small changes in long-term assumptions meaning that these forecasts are purely an indication of a scenario for which I think all players should be prepared.
  • For the large, bureaucratic and slow vehicle makers (almost all of them), this represents an existential change in the market that most of them will not survive.
  • What is likely to then happen is a massive consolidation of the global market in to 5 or 6 vehicle makers down from the 26 or so that there are today.
  • However, it is not all doom and gloom as from this shift, substantial opportunities are likely to emerge.
  • EVs are all likely to be connected to the cloud with a myriad of sensors detecting events within the vehicle and its immediate vicinity.
  • This data should enable a series of highly valuable services for which users will be willing to either pay for or consume advertising.
  • As it stands today, the OEMs have a lock on this data and as long as they don’t let it slip to Google or one of the other digital ecosystems, they should be able to make a good return from it.
  • I very much doubt that it would make up for the revenue lost from lower vehicle demand but it will be much higher margin than selling vehicles which should soften the blow.
  • Of the vehicle makers, I continue to think that BMW and Tesla have the best chances of survival but I think even BMW might struggle to survive a decline in demand of this scale.

Google Auto – Greek gift pt. III.

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Waymo’s time is now.

  • Google’s self-driving division, Waymo, is currently by far the best option for anyone looking for an autonomous driving offering with two caveats:
    • First: It is likely to come at a heavy price in terms of data and long-term differentiation
    • Second: By the time autonomous driving is critical, many of the other solutions may have caught up.
  • Waymo is currently on a charm offensive trying to assuage the fears of automakers who have seen what Google has done to the smartphone industry and are fearful that the same could happen to them.
  • One of the few assets that car makers are likely to have left as the world moves to electric vehicles (EVs) is the sensor data that these vehicles generate.
  • RFM research has concluded that combining Digital Life data generated by the smartphone with the sensor data gives scope for substantial revenues to be generated (see here).
  • There is no doubt that Waymo is currently by far the best at autonomous driving but in order to work, the system has to have full access to the entire vehicle.
  • For any vehicle maker deploying Waymo, this means opening up the entire vehicle to Google thereby putting at risk the only real differentiating asset these companies are likely to have in the long-term.
  • Android Auto has proven to be ineffectual because while it displays apps running on the smartphone on the infotainment unit screen, it has no access to any of the sensor data that the vehicle generates.
  • This is why the announcement by Audi and Volvo at Google i/o that they will deploy full Android in their head units is so significant.
  • By using Android instead of their own proprietary code, they may be letting Google gain access to the sensor data over which I think they must maintain control.
  • Google did announce that the code will be “manufacturer tweaked” Android which I hope for their sake means that all access to the sensor data remains under the vehicle manufacturer’s tight control.
  • Waymo’s argument is that vehicle makers make no money on cars that have already been shipped and that with Google / Waymo there would be some kind of revenue sharing deal.
  • Waymo has not said how much it is willing to give away but should it become dominant, I am pretty sure that the share will be very small.
  • The good news for vehicle makers is that I don’t think that they need to rush into any alliances for self-driving systems just yet.
  • This is because I still think that the technology will be mature long before the market is ready to accept it which gives those that are far behind Waymo today a lot of time to catch-up.
  • Consequently, by the time that autonomous driving becomes a vehicular requirement, I think that the playing field will be far more even with a good array of choices that do not necessarily include the sharing of sensor data.
  • I suspect that this is why Waymo is pushing its wares now as its chances of getting automakers to give Google access to their sensor data are at it their peak.
  • Hence, I think vehicle makers should wait before making a deal for autonomy that they will not need for many years.

Facebook vs. Snap Inc. – Own goal

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Some of Snap’s woes look self-inflicted.

  • Snap appears to be losing key influencers to Facebook not because of a copied service from Facebook, but because Snap is not making it very easy for them to make money.
  • Influencers are social media personalities with large numbers of followers that are paid by companies to feature their products in their videos.
  • Influencers are incredibly important for marketing to millennials and generation Z meaning that this is something that Snap needs to be all over in order to keep advertisers using its platform.
  • Unfortunately, data from Captiv8, the audience tracking service, indicates that influencers are leaving Snap and are finding their way to Instagram.
  • During Q2 17, Snap saw a 20% decline in influencers while Instagram saw an 11% jump.
  • Influencers are not leaving Snap because there is something better on Instagram but because Facebook and Instagram make it much easier for them to make money.
  • Being an influencer is surprisingly hard work and many influencers are struggling to make a good return on their time and investment on Snapchat because Snap does not provide any real support for influencers.
  • In many ways influencers are a bit like developers which in order to get going need lots of love and support.
  • Facebook and Instagram have understood this and acted upon it while Snap’s management does not seem to care that much.
  • Snap seems to be more focused on user to user engagement but this is much harder to monetise.
  • The financial results of this stance are clear with the first two sets of results from Snap being a huge disappointment while Facebook is having one of its best years ever.
  • Snap badly needs to address this situation as influencers are key for marketing to its key user base but while management favours funky animations and camera-enabled spectacles, I can’t see the financials improving.
  • Consequently, I think that Q3 17 and Q4 17 will continue to see the user numbers and the engagement disappoint leading to more pressure on the share price.
  • I continue to think that while Twitter is also stagnating, it is in a much better strategic position as it remains unopposed in its space.
  • Snap by contrast is under colossal pressure from Facebook which I think could lead to the shares dipping well below my fair value of $12.40 a share.
  • If they were to hit $10 or below, I could see acquirors coming out of the woodwork.
  • until then there is only pain to had with Snap.