KEY POINTS
- CONSENSUS STILL HASN'T COME IN ENOUGH: Consensus estimate cuts as of this morning aren't that drastic. Consensus has effectively flat-lined SNAP's revenue growth trajectory from 3Q17 levels (62%) through 4Q18. But note that North American revenue has already slid below those levels (up 46% in 3Q17) and represents ~80% of its total revenue. The prospects for a NA revenue growth inflection are naturally limited by its slowing DAU growth, which is now mostly about MAU-to-DAU conversion at this point, putting more of an onus on ARPU. But the problem there is that self-serve (SS) is becoming a more important driver (+80% of ad impressions), which essentially requires substantial increases in ad load given its lower CPM. Still, that ad load would likely favor the Discover section of the app, which is relatively underutilized by SNAP's users. So stuffing more ad load into the Discover section of the app would just serve as a deterrent to its broader usage/adoption. The counter would be if SNAP can grow its advertiser base enough to lift SS CPMs. We're going to take a wait-and-see approach there; if SNAP can then we'll cover.
- TENCENT IS SOMEWHAT OF A RISK: We're not concerned about a take-out, but liquidity. The 146M shares that Tencent purchased in the open market represents about 25% of SNAP's float, which is comparable to SNAP's short interest percentage (24%). So Tencent has effectively doubled SNAP's short interest since there is less free float to work with, in turn exacerbating the risk of a short squeeze if SNAP is able to pull a rabbit out of its hat on one of its upcoming prints.
Let us know if you have any questions or would like to discuss in more detail.
