Snap – Falling knife.

Forced sale creeps closer. 

• Snap has sent a memo that inadvertently admits that its business model is fundamentally flawed that I think can only lead to the company being forcibly acquired.
• Two things stand out in the 6,000-word memo:
  • First, UX redesign. The company admits that the redesign that led to a decline in daily active users in Q2 18 was a mistake but in my opinion, it lacks the self-knowledge to ensure that mistakes are not repeated.
  • I have long believed that many of Snap’s problems stem from the fact that it does not really test new features before putting them into the market.
  • This is fine for small start-up companies with only a few thousand users who don’t have enough money to engage in a lengthy testing process, but this has no place in large companies with millions of users.
  • This is because no testing and development process tends to mean big mistakes which have a meaningful impact on performance as Facebook has found this year.
  • This was evident in Snap’s Q2 18 results and I see nothing in the memo that states that this issue will be addressed.
  • In fact, quite the contrary as the company is now under massive financial pressure to turn the ship around meaning that there is unlikely to be any time for testing.
  • Second: business model: I have long been of the opinion that the outlook for revenues was weaker than expected because its core user (12-25 years) base has little money to spend and is, therefore, less interesting to advertisers.
  • Snap openly admits this in saying “most of the incremental growth will have to come from older users who generate higher average revenue per user”.
  • Consequently, Snap intends to try an appeal to an older user base and focus primarily on US, UK and France as the most monetizable countries.
  • While the geographic focus is the right way to go, trying to appeal to older users may result in the alienation of its existing users.
  • Furthermore, these users are probably already using Messenger, iMessage (US mostly) and WhatsApp and so enticing them to come to Snap will not be easy.
• Hence, I think that the net result of Snap’s plans is likely to be more disappointment and a failure to hit profitability for the full year 2019.
• Q3 18 results this month are likely to reflect this causing the shares to fall further.
• We are now well below the $10 share price level that I thought (see here) might start to flush out some buyers, but I do not expect to see this happen ahead of the numbers later this month.
• Furthermore, with fundamentals deteriorating more than I expected, those buyers may wait awhile.
• Snap remains a falling knife that I do not want to try and catch.