SNAP DECK & REPLAY | CLICK HERE
KEY POINTS
- DAUs Yet to Recover: In the first chart below, we are segmenting the respondents from our 3Q18 and 1Q18 US surveys by how often they use the platform. We are defining active participation as those who use the service at least once per week. The survey suggests that SNAP's US DAUs have yet to rebound back to 1Q18 levels after declining in 2Q18. Further, all demos reported less frequent usage outside of those over 55 years old, which are naturally a much smaller percentage of SNAP's DAUs. In the second chart, we are segmenting SNAP's remaining TAM by potential interest in the service. The overwhelming majority of respondents without a Snapchat account have no interest in trying the service, suggesting that SNAP may have already exhausted its tangible TAM in the US.
- Profitability Targets are Unreasonable: SNAP's CEO suggested in a letter to employees that the company is targeting profitability in 2019, and attempting to break even by 4Q18. We discussed the ramifications of what had appeared to be mgmt's newfound focus toward profitability during our September 2018 SNAP call (link above). The problem is that SNAP profiles comparably to Pandora in that it has very limited control over its largest cost line. Further, any attempts to cut expenses elsewhere could exacerbate its already-constrained ad inventory and/or advertiser demand. In short, SNAP’s efforts to cut expenses may actually accelerate the onset of declining revenue, which we believe is inevitable at this point, and exacerbate its cash burn. So attempting to target profitability in such a tight window could wreak havoc across its model. For context, SNAP burned almost as much cash (FCF = -$234M) as it generated in revenue ($262M) in 2Q18. Given that its revenue growth has already slid below the 50% level, the amount of expense cuts necessary to achieve 2019 profitability would be staggering, if not just outright reckless.
See the deck & replay above for supporting detail/analysis on our Bearish thesis. Let us know if you have any questions or would like to discuss further.
