I recently got a good question from Shayne on Twitter:
You’re in change of HBS, what’s the lesson from the business case on snap?
— Shayne Flaherty (@kingst00p) October 10, 2018
I think it’s a good question because while many of us saw this coming from a mile away, still many didn’t. In fact it sounds like a lot of younger, newer investors may have jumped in on the Snap IPO with blind faith that it was going to be a sure thing which is too bad.
There were (and still are) plenty of red flags with this one so I figured if for nothing other than my own benefit it would be worth taking a few minutes to jot down some of the lessons I’ve taken away. If you’re going to invest in individual stocks then you need to have a philosophy and lessons help shape your philosophy. Mistakes I made with Twitter early on I think helped shape my thinking regarding Snap and the risks involved.
Learn from the past: First and foremost learn from the IPOs that came before them in a similar space (think Facebook, LinkedIn, Twitter). What are the metrics they are using to measure their success? What are mistakes they made? What was the market (rightly or wrongly) focused on? Remember how one of the bigger concerns regarding Twitter early on was that it was/is difficult to use? Well it doesn’t take a genius to see that Snap is even more difficult to use than Twitter is. No, maybe not for the seasoned Snap user. But for the new, older Snap user that they’ll likely never get it’s a f***ing mess.
Identity crisis: What in the world does Snap consider themselves? They have been pushing the “we’re a camera company” line since the S-1 but that seems to continue to run counter to what investors really consider it: a social network. And now Spiegel’s focus in his recent memo is about being the “fastest way to communicate.” (That phrase was used 26 times in the memo.) What does that even mean and why does it matter? It’s impossible to build a great (or even good) business when you don’t really know what you are.
Leadership matters a lot: Snap’s share structure puts every ounce of power in Spiegel’s hands. The word visionary gets thrown around a lot and it seems like once the idea is out there everyone else just piles on because if that’s what he’s been seen as in some circles then it must be true. But helping to build a messaging app does not make one a visionary nor does it make them a good leader. Frivolous spending, secrecy, hubris, there were a number of signs that Spiegel was going to be a risky bet.
What’s the competitive advantage?: Take a practical look at what they do. Do the network effects exist as they do with other social platforms? In Snap’s case I don’t think so. As a messaging app it’s more of a one-on-one communication which doesn’t offer the same type of network effects. And there are plenty of messaging apps. As we’ve seen thanks to Instagram, it’s totally replicable.
Forecasts can be evil: They can and often do change significantly in a short period of time. Take ‘em with a big grain of salt.
Does the valuation make any sense at all?: In Snap’s case no. It never has. It still doesn’t. It was always valued at a major premium to Facebook on a price-to-sales basis (we can’t use earnings as Snap doesn’t have any). But is it reasonable to believe they can be as big as Facebook one day? No and that is primarily due to the user demographic. Snapchat is essentially for young people and that’s always been its allure; older people (parents) aren’t on the platform. And to be clear that’s not a bad or a good thing; it’s just a fact. But from an investor’s perspective it keeps a lid on growth estimates for sure in a space that places a big emphasis on the size of the user base.
Understand the timeline: Snap’s a camera company; OK that’s fine. You can make all the VR and AR arguments you want for Snap but we aren’t even to a point where the every day user case for VR and AR make total sense. In other words, it’s a market that still has a way to go to reach the mainstream and even then why is Snap the way to play it? What do they have that bigger competitors don’t? Any material VR/AR implications won’t be realized for a long time if ever.
We all make mistakes
These are just some of the most obvious takeaways for me. Investing isn’t about getting it right every time and learning what you’re doing along the way helps tilt the odds in your favor. And to be clear I'm not saying that Snap can never be successful. I mean hey I still own Twitter shares and they've ended up doing well for me, but it sure took a while to get there and they've still got work to do. I'm not putting any of my money into Snap but maybe they'll get things figured out there one day. Then again, maybe they won't.
There were (and still are) plenty of red flags with this one so I figured if for nothing other than my own benefit it would be worth taking a few minutes to jot down some of the lessons I’ve taken away. If you’re going to invest in individual stocks then you need to have a philosophy and lessons help shape your philosophy. Mistakes I made with Twitter early on I think helped shape my thinking regarding Snap and the risks involved.
Learn from the past: First and foremost learn from the IPOs that came before them in a similar space (think Facebook, LinkedIn, Twitter). What are the metrics they are using to measure their success? What are mistakes they made? What was the market (rightly or wrongly) focused on? Remember how one of the bigger concerns regarding Twitter early on was that it was/is difficult to use? Well it doesn’t take a genius to see that Snap is even more difficult to use than Twitter is. No, maybe not for the seasoned Snap user. But for the new, older Snap user that they’ll likely never get it’s a f***ing mess.
Identity crisis: What in the world does Snap consider themselves? They have been pushing the “we’re a camera company” line since the S-1 but that seems to continue to run counter to what investors really consider it: a social network. And now Spiegel’s focus in his recent memo is about being the “fastest way to communicate.” (That phrase was used 26 times in the memo.) What does that even mean and why does it matter? It’s impossible to build a great (or even good) business when you don’t really know what you are.
Leadership matters a lot: Snap’s share structure puts every ounce of power in Spiegel’s hands. The word visionary gets thrown around a lot and it seems like once the idea is out there everyone else just piles on because if that’s what he’s been seen as in some circles then it must be true. But helping to build a messaging app does not make one a visionary nor does it make them a good leader. Frivolous spending, secrecy, hubris, there were a number of signs that Spiegel was going to be a risky bet.
What’s the competitive advantage?: Take a practical look at what they do. Do the network effects exist as they do with other social platforms? In Snap’s case I don’t think so. As a messaging app it’s more of a one-on-one communication which doesn’t offer the same type of network effects. And there are plenty of messaging apps. As we’ve seen thanks to Instagram, it’s totally replicable.
Forecasts can be evil: They can and often do change significantly in a short period of time. Take ‘em with a big grain of salt.
Does the valuation make any sense at all?: In Snap’s case no. It never has. It still doesn’t. It was always valued at a major premium to Facebook on a price-to-sales basis (we can’t use earnings as Snap doesn’t have any). But is it reasonable to believe they can be as big as Facebook one day? No and that is primarily due to the user demographic. Snapchat is essentially for young people and that’s always been its allure; older people (parents) aren’t on the platform. And to be clear that’s not a bad or a good thing; it’s just a fact. But from an investor’s perspective it keeps a lid on growth estimates for sure in a space that places a big emphasis on the size of the user base.
Understand the timeline: Snap’s a camera company; OK that’s fine. You can make all the VR and AR arguments you want for Snap but we aren’t even to a point where the every day user case for VR and AR make total sense. In other words, it’s a market that still has a way to go to reach the mainstream and even then why is Snap the way to play it? What do they have that bigger competitors don’t? Any material VR/AR implications won’t be realized for a long time if ever.
We all make mistakes
These are just some of the most obvious takeaways for me. Investing isn’t about getting it right every time and learning what you’re doing along the way helps tilt the odds in your favor. And to be clear I'm not saying that Snap can never be successful. I mean hey I still own Twitter shares and they've ended up doing well for me, but it sure took a while to get there and they've still got work to do. I'm not putting any of my money into Snap but maybe they'll get things figured out there one day. Then again, maybe they won't.
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