MorningWord 5/12/17 – The only true currency is what you share when you’re uncool.

by CC May 12, 2017 9:33 am • FREE ACCESS

The only true currency in this bankrupt world is what you share with someone else when you’re uncool.

~ Almost Famous

Snap reported their first quarter as a public company and investors aren’t happy.  In our preview of the event we said:

I have little doubt that DAU or ARPU miss and squishy guidance will flush out some retail holders who bought after the IPO pop…

30% of the shares outstanding are held by three insiders, nearly 13% by two early venture capital firms, then about 10% from massive mutual fund complexes who will only be net buyers of the stock. None of this means that the stock can’t go down 10 to 15% tomorrow, it just means the likelihood of it staying down for long, without some massive adverse fundamental change in their business (which is still emerging) is not that great.

The results and commentary don’t differ much from the narrative of the company’s IPO roadshow in late February/ early March. That there probably isn’t a massive rush to buy the stock either, even down 20%. We still have limited info on potential user growth and their ability to monetize, means the valuation is hard to justify. It remains unknown what will be right entry point will be for curious longs, but it would be very surprising if the post-IPO highs remain the all-time highs. The $20 billion question right now seems to be whether SNAP stock is more like Facebook (FB) which had a rocky start out of the gate and proved every naysayer wrong and actually grew into its valuation (and has rallied since by more than 200% from its post-IPO lows in 2012). Or whether it is more like Twitter which rocketed out of the gates, up 100% in the weeks after its November 2013 IPO but has since dropped more than 70% and has been left for dead. But it’s more likely to carve it’s own path.

SNAP stock seems different because as a consumer product it’s a bit different than most social media that came before it. It’s strength has always been that it appealed to a younger generation of social media users who seem to only reluctantly use Facebook and Twitter. CEO Evan Spiegel’s (and his co-founders) concept of ephemeral social media was genius, especially for a generation that had grown up with their entire lives documented on the internet… forever. It was nearly impossible that that brilliant idea could come from anyone that wasn’t in their early 20’s (Spiegel is still only 26!)

Obviously, the working assumption among most market participants is that Facebook will come to dominate all social media, as it mostly has to this point. When any upstart threatens that moat, Zuck has either bought them early for next to nothing (as was the case with Instagram, one of the best defensive deals in internet history) or just incorporates (steals) their best features into Instagram and Facebook (as is the case with Snapchat stories, and to some extent Twitter real-time news).

On the conference call Speigel was asked point blank about the threat of Facebook. From Recode:

On Snap’s Q1 earnings call Wednesday, Spiegel was asked bluntly: “Does Facebook scare you? Why or why not?”

Spiegel laughed. Then talked about how important it is to be creative. Then said this:

“At the end of the day, just because Yahoo, for example, has a search box, it doesn’t mean they’re Google.”

Niiiiiice. Worth the wait!

Whether or not Spiegel should be concerned about Facebook is another question. Ever since Facebook started copying Snapchat’s Stories feature into all of its app, Snap’s growth has slowed. Snap chalked up the slowdown to a technical issue with Android users in Q4, which it says it fixed in Q1, though it added just 8 million new daily users this past quarter after adding 15 million DAUs one year ago.

That sounds like more than an Android issue. Social media is one of the most fickle businesses out there with fads here today and gone tomorrow. Snapchat’s genius, ironically, was based on content here today and gone tomorrow. That’s always meant a different monetization path for Snapchat than for the social media properties that came before it. And as the product matured, and Snapchat added great features like Stories, they quickly realized they were doing R&D for features about to be added to the Facebook empire.

Let’s face it. Snapchat is 1000 times cooler than Facebook. And it’s demographic is super desirable for advertisers. But if the past has taught us anything, cool can stay niche for a long time. Apple was the cooler product than Windows for decades. It’s market share in the single digits reflected just how cool it was 🙂 . Apple became the biggest company in the world decades later not because it came-up with even cooler products, but because it nailed a mobile operating system that everyone from a 3 year old to a 99 year old found easy to understand and use.

That’s Facebook’s real advantage over every other social media company. To an outsider, Twitter must seem like a confusing string of code words, inside jokes and incomprehensible conversation strings. To older generations that didn’t grow up with their entire lives documented online, SNAP’s concept of disappearing images and text isn’t as compelling as it is for millennials. Facebook’s strength isn’t because it’s cool, it’s because it’s uncool.