A millennial perspective on the Snapchat IPO

On Friday 3rd 2017, Snap filed for their IPO. Their S1 - their documentation revealing their business - makes for very interesting reading.

I've been pouring over the documents and it's a mixture of great stats - impressive user engagement and not so great stats - slowing user growth.

Below are my in depth takeaways from the document:

Snapchat Is Not A Social Network

Snap Inc. is a camera company.

“In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones.”

This confirmed my initial feelings around what I’ve been saying for a very long time: Snapchat never set out to be a social network. Therefore, it is deeply unfair to compare Snapchat to Facebook or Instagram in terms of users or growth rate, on this basis. Their S-1 shows stats on their latest acquisitions, including the mobile search start-up, ‘Vurb’, which will enable people to do more than just send pictures. Their whole idea is to use the camera to become the gateway to the world.

This creates a problem for investors however, in that there are not that many reference points currently on the market. The closest, hot camera company is ‘Go Pro’ and even they aren’t doing so well at the moment, so this might spell bad news for Snapchat. Nevertheless, it could be argued that this spells out exciting investment opportunities, in that entering unchartered territories means they could either blow up or blow out.

Better Metrics

When we talk to brands, one of their biggest concerns is the data and analytics behind campaigns. Snapchat currently partner with third party analytics providers to calculate metrics, however as they mention in their S1, "today we rely primarily on our analytics platform that we developed and operate."

This is great news for brands and agencies as it provides greater accountability and measurability into campaigns, enabling them to reach their audience in a much more targeted, calculated way. For investors, this is equally good news as it hints at a self-service offering which Snapchat will be able to provide and thus let it reach even wider numbers of brands.

Snapchat is not going to get as big as Facebook

There’s an interesting excerpt in the S1, which hints at the future potential of Snapchat.

“If foreign governments think we are violating their laws, or for other reasons, they may seek to restrict access to Snapchat, which would give our competitors an opportunity to penetrate geographic markets that we cannot access...for example, we have very limited access to the China market, as we have not yet established an operating presence in China to support Snapchat. Access to Google, which currently powers our infrastructure, is restricted in China.”

The above will be cause for concern for investors. After the USA, China happens to be the second biggest market for advertising, and not being able to reach that audience will be a problem for Snapchat. It’s interesting to also note that they have committed a further $2 billion to Google, rather than just going forward and building their own infrastructure.

However, this is where things get a little murky as Snapchat say “we are currently negotiating an agreement with another cloud provider for redundant infrastructure support of our business operations. In the future, we may invest in building our own infrastructure to better serve our customers”. So on the one hand, they’ve committed $2 billion for cloud infrastructure opportunities and yet are also looking for other potential partners – hmmm.

An interesting thing here was this admission by Snapchat as to their limit to scale-

"...in addition, because our products typically require high bandwidth data capabilities, the majority of our users live in countries with high-end mobile device penetration and high bandwidth capacity cellular networks with large coverage areas. We therefore do not expect to experience rapid user growth or engagement in countries with low smartphone penetration even if such countries have well-established and high bandwidth capacity cellular networks.”

Snapchat also made very clear their focus on being for the iPhone as opposed to Android, citing “although our products work with Android mobile devices, we have prioritized development of our products to operate with iOS operating systems rather than smartphones with Android operating systems”.

This is pretty interesting, because it suggests to some extent that Snapchat recognise that they might not be as huge as Facebook or Instagram, but they are not trying to be. To them, they are not a social network.

I don’t think this limit in audience impacts users that much. For instance, it is debatable whether the all-inclusive nature of audiences on Facebook or Instagram enhances the user’s experience significantly. The focus on iPhone however may be an issue; it is possible that Android users may feel as if they are missing out since iPhone users get much better experiences and earlier updates to Snapchat.

Snapchat's daily user growth has slowed.

Snapchat averaged around 122 million DAU growing 14% in Q1, in 2016, then expanding at 17.2% growth rate in Q2 to 143 million DAU. At this point, DAU growth slowed to 7% and 3.2% in consecutive quarters.

Snap mentioned that one of the major reasons for this was “technical issues that diminished the performance of the application", however they couldn’t avoid referencing the impact of Instagram stories on their performance (Instagram’s Snapchat clone) stating, “our competition may mimic our products and therefore harm our user engagement and growth”.  It is no coincidence that growth started to stagnate at the same time Instagram brought out their copy product.

In some roundabout way, I believe this to be good for users. Snapchat is a private place and they often lauded their app as a place for sharing silly conversation between friends. The lack of rapid growth could be interpreted as Snapchat not being as appealing to older audiences. To an investor, this lack of strong user growth might be seen as negative. Nevertheless, to the average 15-year-old girl who lives on Snapchat, the lack of any of the older guys can be seen as a positive.

Engagement is insane

This goes back to the idea that Snapchat are not ever going to get as big as Facebook or Instagram. However, what they lack in reach, they make for in impressive engagement.  An impressive stat for Snapchat was that users open the app 18 times a day and use it for 25-30 minutes, with 60 percent of them creating Snaps or using its chat feature.  THIS IS incredibly IMPRESSIVE and should be what brands ought to focus on going forward. Additionally, one should take heart in that although on average users visit Snapchat more than 18 times a day and spend 25-30 minutes on Snapchat every day, users younger than 25 visited Snapchat more than 20 times a day and spent 30 minutes.

A focus on ARPU

I spent some time reviewing both Facebook’s S1 filing and Snapchat's S1 filing, and Snapchat distinctly mentions ARPU - average revenue per user as a focus of theirs. When Facebook filed their paperwork, they spoke in very general vague times about their advertising strategy focusing more on user growth. Snapchat however, put theirs front and centre:

“Our global average revenue per user, or ARPU, in the three months ended December 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, our ARPU in the three months ended December 31, 2016 was $2.15 compared to $0.65 for the same period in 2015. ”

This should be of comfort to investors. Snapchat are still in the nascent stage when it comes to advertising and their focus on maximising monetization for every user will be good news for investors. To put things into context, Facebook's average revenue per user grew worldwide by 29 percent in the last quarter, whilst Snap's grew by more than 300 percent for the same period.

Snap also mentions that "Substantially all of our revenue comes from advertising" which bodes even better for investors. If Snap can clock in $404.5 million in revenue in 2016 from advertising alone then this positions itself incredibly well as it brings out new products. Snap have mentioned that they’d be investing heavily in Spectacles going forward – although they mentioned “We have limited manufacturing experience for our only physical product, Spectacles, and we do not have any internal manufacturing capabilities” – I think this is is a sheltering tactic; a tactic used to placate investors in case things go wrong. My prediction is this: Snapchat will bring out cheaper, more affordable glasses for their younger audience, which will contribute significantly to revenue.

Conclusion

The S1 is a mixed bag, I'm still very bullish on Snap as a company as I believe that we haven't seen it in its maturity stage. I also believe the fact that they own the mindset of the younger generation is incredibly appealing to advertisers and will create more opportunities to monetize. Indeed the slowing growth in DAU is a cause for concern but as I said from the beginning, Snapchat was never going to be large as Instagram and Facebook, its just not a utility in the same way that Instagram and Facebook are, so user reach should not be the key metric of success. In my opinion, the engagement and the ARPU potential when monetization is really turned on should give investors cause for cheer.