Fundamental view on Snap

12:25 AM




I understand and know traditional investment metrics. But I also prefer to learn from the best.

For Value Investing this will be Warren Buffett and Charlie Munger. In order to make this short, I will summarize my research into the 3 principles.


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FIRST PRINCIPLE 
 Treat a share as a proportional ownership of a business. 

This principle basically asks us to understand the business in full and I have been reading much on social media marketing to prepare for this IPO.

The move to the mobile/connected generation is inevitable. Marketing has always been a battle for eyeballs.

Google, Facebook, YouTube, Instagram (maybe Twitter) are traffic sources for eyeballs. There are very few other ways to market your business to a connected generation.

Snapchat has a very distinct user base, if you are above a certain age you will not use it. It represents more than just a brand, it represents a generation. 

Nude selfies, unfiltered, uncoordinated, pure unadulterated truth. Life summarized in a short video or Snap.

Facebook had this problem and so did Instagram, showing a perfect or better side of you. Snapchat tends to be more unstructured.

It is a brand akin to a cult, it stands for something. It stands for a younger generation.

Some say it can be displaced by Instagram stories, but I feel it cannot change the Nuance of the company. 

Gary Vee said it best(paraphrased): "if snapchat came out with a fashion label, no one would think its weird. Instagram can't do that". Mr. Vaynerchuk is an investor in Snapchat, but his view on marketing is second to none. What he is trying to say is the brand is a lifestyle more than just an app especially in the younger generation.

- Target Market - Snapchat has a very strong audience(sub 35-year-olds) and that cannot be dispelled. At least for now. Can it increase to target the older audience, I think not. Growth limited.

- Moat(barrier to entry) - To reach where this level of userbase, it had to be hacked, criticized of being a sexting app and had 3-4 years of lead time. Is something new likely to take its place? I do not think so.

- Pricing Power - if Snapchat were to increase prices, would advertisers be willing to pay. Yes! They have pricing power especially in this competition for eyeballs

Conclusion: Good! I love it!
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SECOND PRINCIPLE
 Buy at a significant discount to intrinsic value.

- This stock is very expensive, looking at valuation metrics compared to its peers i do not see this as attractive.

If i were to just use the most important metric in the Warren Buffett arsenal, how does it stack up?

Buffett uses Owners Earnings:

Earnings for the last Financial Year was negative and like this Seeking Alpha analysis points out well, valuations are crazy at these levels(link).


 Part of the reason for these valuations is that Tech generally is a super exciting industry, right now. I generally do not like industries that are in fashion.

The S&P as a whole is also very expensive at the moment, exasperating the problem of value.

Oh don't forget their famous cash burn. Quote from Bloomberg:  "Even compared with other notorious cash-burning companies, Snapchat's ratio of cash burn to revenue is in a league of its own"

Conclusion: Bad!
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- THIRD PRINCIPLE – Make Mr. Market your slave(Nope!)

Mr. Market has two things on his side, 1) a "hot" industry meaning everyone is looking at it as the next big thing 2) S&P as a whole is overvalued.


Conclusion: Bad!
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INVESTMENT THESIS:

Current valuations are not interesting to me, if there is a great stock market crash then I would believe in the long-term value of the company. 

But speaking today and all the hype that surrounds this IPO. I would not play a crowded space like this because there are less opportunities and they tend to have a lower margin of error. 

Less sexy industries, present better risk:reward for less competition.

Those trades are easier to win.

Passing on this opportunity

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