Snap's IPO has been immensely successful so far. It is up around 50% since its listing in the first week of March, trading around $25 compared to its listing price of $17. However, we think this stock is extremely overvalued, and is poised to decline by over half in 2017. The biggest reason? Instagram. As we wrote multiple times in the past, Snapchat's growth is being cannibalised by Instagram Stories in literally every single market in the world. As further proof, Instagram Story's success is not only hurting Snapchat, but also its Asian copy cat Snow. Below, we show case our evidence and logic one by one.
Instagram's Disruption of Snapchat
While we've written about how Instagram is catching up to Snapchat in popularity, now we have evidence that Instagram has outpaced Snapchat as the most popular photo & video app in the world. Below is a chart featuring Instagram & Snapchat's monthly average download ranking in the Apple App Store for the Photo & Video Apps category. As you can see, Instagram has either surpassed or matched Snapchat as the most downloaded app in the world. This just confirms the fact that Instagram Stories is the ultimate disruptor for Snapchat: when a general-purpose photo & video application (i.e. Instagram) has a good enough functionality (i.e. Stories) to replace a use-specific but high performance app (i.e. Snapchat), most users will switch to the general-purpose app in order to reduce the "cost" (i.e. time & effort of opening & maintaing multiple apps).
What's even more troubling for Snapchat is that its user growth had begun to slide rapidly in August 2016, when Instagram launched Instagram Stories. While Snapchat was still ahead of Instagram in many markets in Q4, just the fact that Instagram was catching up & overtaking Snapchat as the most downloaded apps a few days a month was able to slow Snapchat's growth to 3% in Q4. Now that Instagram is actually winning against Snapchat in virtually every single country in the world paints a very gloomy picture for Snapchat: it could very well be losing users in Q1.
Instagram Is Killing Snow, Snow Runs to China
In support of this view, we've also found that Instagram Stories has not only been killing Snapchat, but also has been killing Snapchat's copycat Snow. In response to its declining competitive position in Asia, Snow even began to solely focus on the China market where Instagram and Snapchat are essentially banned: Snow released a China-only version of its app in September of 2016, while keeping its app in other markets the same. Snapchat didn't even rank high enough to appear on our graphs. Rather than being a well protected platform with deep moats, ephemeral photo & video sharing is just a feature that can be easily integrated by a bigger and better app called Instagram regardless of geography or culture.
Monetisation Potential of Snap vs Facebook?
Not only that, Snapchat is in a significantly worse position than Facebook in terms of its ability to make money. Take, for instance, the average time spent per user for both companies. Since they both make their money advertising, how much time their users spend on their apps is one of the most important factors in determining how much they can earn. While Facebook revealed at the beginning of 2016 that an average user spends 50 minutes per day on its platform, Snapchat's best users only spend 30 minutes per day on Snapchat.
Not only that, Snapchat made $2.8 of annual revenue per daily active user as of 2016, compared to $23.9 for Facebook. Sure, Snapchat has a younger audience, which should be commanding a premium price on its advertising inventories. However, even if Snap were to match Facebook in terms of revenue per daily active user (accounting for both the younger audience & difference in time spent), it would be able to make only $3.6bn of revenue per year (150mn DAU x $24), since its user base is no longer growing as we noted above. As a point of reference, Twitter only made $2.5bn in revenue in 2016 with a user base of around 150mn DAU.
Crazy Valuation Gap
If we use the fully diluted share count for SNAP, SNAP is currently worth about $40bn, compared to FB's value of $400bn and TWTR's $11bn. Even if we take the $3.6bn of potential revenue at its face value and assume SNAP were to make the 37% net margin that Facebook is currently earning, SNAP would be making a potential net income of $1.3bn, implying 30x PE ratio for SNAP.
This means that you are paying 30x the maximum earnings that SNAP will ever make some time in the next 5 years or so. On the other hand, Facebook is only trading at 20x its forecast earnings in 2018, while growing both its user base and revenue very rapidly. Given this, we think there's a very attractive opportunity to buy FB stock while shorting SNAP. Given that SNAP's user base is no longer growing, we believe that it will gradually lose its hype in both investing and advertising world, and ultimately settle around where Twitter is currently trading around $10-$15bn, representing over 60% downside.
|Company||Market Cap||PE Ratio||EV/Sales|
|$400bn||20x 2018||7.7x 2018|
|Snapchat||$40bn||30x 202X||14x 2018|
|$11bn||37x 2018||3.6x 2018|
Would Spectacles be the saving grace for Snap? We don't think so. Not that we have some proprietary data on this, but we have visited the Spectacles store in NYC right next to the Apple store on the Fifth Avenue on 3 separate occasions. While the Apple store was bustling with customers and tourists, the Spectacles store was completely empty: there were more employees at the Spectacles store than customers. And given Snap's jaw-dropping negative gross margins, they are probably selling those at a loss. It seems that Spectacles were nothing more than a hyped advertising campaign that got a lot of media frenzy, but failed to get any real-world traction.