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THE HEDGEYE EDGE
SNAP has a lot of hype right now as the big new thing social media platform, much of which has been rightly deserved. SNAP has over 70M daily active users, which is nowhere near FB, but still impressive since TWTR only has an equivalent number of monthly users. Further, many of those users are millennials and younger, which is a highly-coveted demographic that has historically been tougher for advertisers to reach.
However, despite SNAP’s success in a relatively short period of time, both it’s near-term and longer-term prospects are more questionable. Incremental user growth will prove much tougher from here, especially since SNAP has boxed itself into a fairly restrictive user metric (daily vs. monthly). Further, while SNAP is currently growing revenues at a triple-digit growth rate, consensus is asking way too much of them for both 2017 and 2018 revenues, largely because of inappropriate comparisons to Facebook. We expect the hype train to come to a halt as we get closer to year end.
INTERMEDIATE TERM (TREND)
The sell-side has been piling into our call as of late, and the stock has been reacting in kind (down 13.5% in June). There’s always the prospect of a near-term pop in the stock from a bullish headline, but we suspect the stock will make lower and lower highs from here.
LONG TERM (TAIL)
SNAP has structural impediments to both growing both its user base and revenues. Snapchat is a product suited for more technology advanced markets like the US, and we estimate that SNAP has already penetrated most of the low-hanging fruit (users in those markets). SNAP’s longer-term revenue prospects are also hindered for the same reason. While much of the street is pointing to FB as a proxy for how well SNAP can monetize it’s existing users, it’s a faulty comparison that is leading the street to overshoot SNAP’s monetization potential. We expect SNAP to eventually settle in as a mid-cap company rather than the large-cap that it is today.
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