$SNAP Position: 200,000 shares at $8.15
Sentiment is just awful for after missing numbers quarter after quarter.
What I like: -Massive DAU and MAU, still growing users, albeit not in North America.
-Revenue is growing YoY, albeit at a low rate.
-Subscription revenue is at $700mm annualized now. They’re aggressively trying to grow it, most recently by requiring a subscription for Memories storage of over 5GB.
-Spiegel is out in public making a lot of speeches and seems to be fired up in turning the ship around. His recent letter to employees showed he has some renewed vigor and talked about “start-up like returns”.
-Balance sheet is ok, leverage ratios are fine. They have time to turn this ship around, there are no dangers of breaching any debt covenants.
-Valuation is cheap and the stock has been left for dead. Market has no faith in management and it feels like the company only exists to enrich insiders. I like this because it’s priced for failure, yet a hint of a turnaround can easily make this a multi-bagger.
What I don’t like: -Company can’t seem to turn a GAAP profit. Too many employees, too much investment into non-core such as Spectacles; a lot of fat needs to be cut.
-Excessive stock-based comp. They are sensitive to it and recently started buying back stock. Dilution rate is decreasing.
-Gross margins at 51% are low for this type of business.
-User growth is mainly in India, where ARPU is around 7x lower than in the U.S.
What needs to happen for the stock to re-rate:
They need to start growing revenue double digits and start showing positive free cash flow every quarter going forward.
One way to do that is by growing the subscription revenue aggressively as that gets a high multiple and is fairly steady high margin revenue. Keep coming out with must-have features that are only accessible to subscribers.
Another way is to cut a lot of employees. Too many mouths to feed, too much comp, and not enough to show for it. Layoffs are sad, but necessary, headcount keeps growing double digits while revenue doesn’t.
Evan is a young billionaire married to a supermodel and living in California. He’s achieved everything in life, but you can see that he’s really pissed at Zuckerberg for ripping off Snap features (check out his LinkedIn profile for example). It seems he’s finally got a little fire in his belly now, and he’s making it his mission to turn his sinking stock around.
