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- The ‘Snapchat’ search trend is negatively trending, suggesting new adoption is slowing.
- The search trend for ‘Advertising on Snapchat’ is negatively trending suggesting marketing dollars are being diverted to other platforms.
- YoY DAU rate of growth has slowed.
- Expenses show signs that they are getting out of control.
- ARPU rate of growth has slowed.
- Our calculation of the rate of growth in Average Income Per User has slowed in a significant way.
- Internet search trends provide confirmation that the metrics above are in for a longer-term downtrend.
- We continue to maintain a negative sentiment, and expect that financial fortunes to deteriorate in the near term.
Following up on our last post ‘Snapchat IPO: Investors be Weary!’ we raised the question of whether Snap Inc. (‘Snap’) presented itself as promising investment opportunity for investors or an opportunity for early investors to cash out and run for the exits. At the time, there was little by way of financial information, so we took to Google Trends to give us an understanding of search interest in the term ‘Snapchat’ and discovered that on a worldwide basis the trend was starting to turn negative. Even when isolating for searches in it’s largest market, the U.S., we noted the same concerning trend. As with our assessments of all companies in the social realm, we place a lot of emphasis on search trends as indicative of future financial fortunes. Suffice to say, we expected that the future was grim for Snap.
With the recent S-1 filings, we’re putting our above assessment to the test.
Daily Active Users
Snap sets out early in its S-1 filings that daily active users (‘DAU’) are a critical measure of user engagement, so we’ll begin with that. It’s important to note how Snap sees DAU affecting its business:
“…If our daily active user growth rate slows, our financial performance will increasingly depend on our ability to elevate user engagement or increase monetization of users…”
They go on to chart the average DAU figures per quarter[i] which at first look appears to be very positive,
but when you focus on the Year-Over-Year rate of growth in average DAU we see a different story:
While Year-Over-Year DAU growth currently runs at 57.5% on average[ii], it’s significantly slowed down since 2014. Over the last Quarter, that growth rate has slowed to an unprecedented 48% which to some may appear to be impressive, but the problem is that it coincides with an overall trend that growth is slowing which is further confirmed by the most recent Quarter over Quarter Average DAU growth:
Of particular concern is the slow down in Quarter-Over-Quarter growth observed over the last two quarters which came in at 7% and 3% respectively. This is a significant slow down compared to the prior nine quarters and our Google Trends indicator of internet user’s sentiment towards the platform gives us evidence that this is a lasting trend as searches for the term ‘Snapchat’ (excluding the month of March which was largely influenced by news of Snapchat IPO) have been on a downtrend since July 2016:
For those thinking it may be a little too premature to sound the alarm, I would be inclined to agree, that is, if the company was profitable.
The reality is the company is far from turning a profit. Year ended 2015, the company saw revenue of $58.7m and a net loss of $372.9m. The bulk of Snap’s expenses stemmed from cost of revenues and General and Administrative expenses which ran at $182m and $148m respectively. 2016 year end saw revenue jump to $404m, a 689% increase which sounds impressive but when you look at the rate of expense growth, you get that gut wrenching feeling. Cost of revenue, R&D and sales & marketing saw a 247%, 223% and 459% respective increase from 2015. This means that revenues are playing a game of catch up. For Snap to turn a profit, they’ll have to continue increasing revenues at a very high clip in hopes of continually outpacing expense growth which is also growing at a fast clip. Another possible path to profits would be to increasing average revenue per user:
Average Revenue Per User (ARPU)
This metric looks at the quarterly revenue that Snap earns per DAU.[iii] If you could squeeze more revenue per DAU, then Snap’s business becomes less reliant on it’s DAU growth. What we observed was on a nominal basis ARPU increased. But remember those expenses, they’re growing at the same time, so it’s important to focus on percentage growth in ARPU, which on both a QoQ basis (and YoY basis) shows a negative trend:
Marketing dollars spent on the Snap platform is also part of the ARPU equation. If DAU’s are increasing in lock step with ARPU, that means more marketing dollars are being spent on the platform. In the case of Snap, we noted in the most recent quarter, average DAU’s increased 3% while ARPU increased 25% meaning that more marketing dollars are being spent on the Snap platform. However, as noted above, the QoQ ARPU growth rate fell significantly in the fourth quarter and search trends suggest that this may be longer term trend as searches for the term ‘Advertising on Snapchat’ show a negative trend since August 2016:
But even with DAU and ARPU growth decreasing, if each DAU becomes more profitable then Snap becomes less reliant on both metrics. We conducted a rough calculation of Average Income Per User (AIPU)[iv] to gauge profitability and to our surprise, we note that with the exception of fourth quarter 2016, Snap has lost less money per DAU with the exception of fourth quarter 2016 where AIPU fell to a loss of $1.08:
Breaking down the above by looking at the rate of growth in AIPU we note a significant downward trend. This metric in and of itself should be a warning to investors the slower the rate of growth in AIPU, the more patient investors will need to be before they see anything resembling a profit.
We emphasize that a lot of insight into the financial fortunes of a company operating in the consumer/social realm can be obtained by observing search trends. Snap was case in point but we can rhyme off numerous other companies that we could gain equal insight by reviewing key search words and phases.
Snap’s financial performance at first glance may appear positive, but taking a closer look shows an underlying slow down in the rate of growth across all metrics, Average DAU, ARPU and AIPU. For a company turning a profit and entering maturity, this may be an acceptable fate. However, given how far away Snap is from the black, investors should snap out of this bullish hysteria and stay away.
[i] Chart taken from Snap Inc’s S-1 filings to the SEC. Reference: https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm
[ii] Calculated by taking the last four quarters year-over-year growth rate and dividing by four.
[iii] Calculation derived from Snap’s S-1 filing and is computed as quarterly revenue divided by average DAU for the quarter.
[iv] Calculated as quarterly income divided by average DAU. Since Snap has been operating under a loss since inception, we chose to shift the AIPU values into positive territory by shifting all values by a nominal $1.5 allowing the growth calculation to capture the magnitude of the change. We get it, it’s not perfect, but it helps for our purposes.