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$SNAP is the ultimate contrarian pick. Everyone knows the cons: dilution, inept management thus far, poor ad stack, low ARPU, dick pick app, only teens use it, etc….thus the stock is priced accordingly.
SNAP’s revenue has 10x’d since its IPO, yet its market cap has fallen by a third since then. Note that since the market cap figure is used (and not the stock price) this stat accounts for dilution! This is a fascinating statistic, almost mind-blowing.
The main reason for this is simple: although SNAP has grown users and revenue by leaps and bounds, it has NEVER made a profit in its history. This is, yet again, an absurd statistic, especially for a company that has almost a billion users and has been around for well over a decade.
It has not made a profit because management has simply never cared about profits. The founder and CEO became a billionaire in his 20’s after the IPO, and since his financial needs were taken care of, he decided to go on an empire building spree, which required a lot of capex and high compensation. Unfortunately, he didn’t succeed financially (although snap created a lot of innovative products, others such as meta just copied and monetized them, leaving snap in the dirt).
Normally, in this situation, an activist would build up a position, get some board seats, fire the CEO, trim the fat and wasteful spending, and the stock would spike up. However, the founders have total control due to their voting rights, and thus SNAP has been left in the cold by investors.
Here is why I think an inflection is coming, and why the stock could explode within the next 1-2 years:
Management FINALLY recognizes the need to make money. They have said this several times recently, and in the Q3 call in November, they said they would be willing to monetize even at the expense of user growth and engagement.
This is a sea change in attitude. SNAP has just wanted to grow in the past, without caring about profits. The fact that they are pivoting seems to be ignored by Wall St.
There is a lot of low-hanging fruit they can pick. You see, when you have a billion users, even small things can create tremendous cashflow. Let’s take their recent announcement to monetize Memories storage. Even if 10% of users agree to pay a couple bucks a month, that could be billions in free cash flow with zero cost (they’re already providing unlimited storage for free).
Same with their ad stack. Small improvements can make huge changes due to their massive scale. Without getting too granular, things like Sponsored Snaps have performed really well, and advertising in the inbox was previously an anathema to them.
The important thing is that management has a changed attitude when it comes to profits.
I could write another ten thousand words about this, but I think it’s long enough. I posted my position above (300k shares) and think we will hit $20 this year after Wall St sees several quarters in a row or increasing free cash flow and profitability.
Oh yeah, if the Spectacles release goes well this year, the stock will fly. If it doesn’t, it won’t affect the stock at all since failure is already priced in. Think of Spectacles as a lottery that comes with zero cost.
Disclosure: Long 300,000 shares at $7.6.