KEY POINTS
- MORE COLOR ON INVENTORY CONTSTRAINTS: The print itself wasn't that interesting, so we're skipping the review. We did get some good nuggets from mgmt that confirm our thinking that its users are primarily using SNAP as a chat service, which is an issue since the bulk of its potential ad units live in the Discover section. We estimate based on mgmt's commentary that daily usage remains at a little more than 30 min/day, while its users are creating over 20 snaps/day. Combine that with the prior DAU average of 18 daily logins (S-1), and it's pretty clear that chat/Stories are dominating its users time. Further, mgmt had suggested that CNN and Bleacher have global monthly audiences of 12M and 16M against a domestic DAU base of 75M, so it's probably safe to assume its users aren't accessing Discover daily, especially since those publishers are probably the most popular since mgmt chose to call them out specifically. As far as its DAU runway is concerned, mgmt had suggested that it can currently reach 75% of the 13-34 yr-old US smartphone population with a multi-week ad campaign, which basically means it has at least 75% active monthly penetration in those cohorts. While that is extremely impressive, it also means it is running out of track for DAU growth, especially since that 75% is not inclusive of those who have churned off (see below survey results for context).
- 2017 SHORT ALMOST PLAYED OUT: We were originally targeting 2H17/2018 as the focus of our short, but it appears that our thesis is slowly getting baked into consensus estimates. Based on what we can see as of the morning, the sell-side has significantly cut its 2H estimates after mgmt indirectly flagged 3Q17 by quantifying the non-recurring tailwinds in the comp. However, even after the estimate cuts today, we're still struggling to get to 2H estimates. We loosely estimate based on mgmt 2Q commentary that roughly 80% of its revenues are coming from branded advertisers, so we're struggling to see how SNAP could grow in excess of the seasonality that has already emerged within its operating results. For context, the level of sequential growth that the street is expecting from SNAP in 3Q is still well in excess of anything that TWTR has ever reported in the comparable period, and note that TWTR had been egregiously overmontizing its model for years. However, we want to caution that there is a wide delta b/w the high and low end of consensus estimates for 3Q17/4Q17 ($66M/$176M), so if we see additional downgrades/cuts over the coming months, then the short may be played out before its next earnings release.
Let us know if you have any questions or would like to discuss in more detail.
