Yesterday I ripped Blue Apron (NYSE: APRN), which is imploding only a few months after its IPO.
I’m angry that the IPO ever occurred.
The same goes for the Snap (NYSE: SNAP) IPO.
Snapchat’s viability as a social media platform is quickly waning.
The supposed “heir to the throne” of social media managed to grow its subscriber base by only 4% in the latest quarter.
Shares have been in free fall since IPO-ing in March, and the collapse should only continue from here.
Need more proof? Gladly!
Here are three ticking time bombs buried deep inside of Snap.
No Moat Equals Certain Death
For thousands of years, the world’s most crucial castles were protected by moats.
In today’s technology business climate, lack of an economic moat will likely doom a firm.
If you’re unfamiliar, an economic moat is simply a business’s ability to maintain a competitive advantage over its rivals.
Take America’s infamous FAANG (Facebook, Apple, Amazon, Netflix, Google) companies, for instance.
All of these technology firms have a substantial protective ring around their businesses.
An upstart online retailer is going to have a whale of a time building out a platform to combat Amazon. That is, if it isn’t scooped up by the online shopping behemoth first.
Rival Samsung has been eating away at Apple’s smartphone market share for years.
But Apple’s ability to maintain premium pricing power over cheaper Android phones lets shareholders sleep soundly at night.
And after Yahoo was acquired by Verizon, only Microsoft’s Bing offers any kind of challenge to Google’s search engine supremacy. If you could call Bing a real rival to Google. (SPOILER: It’s not.)
So what about Snap’s moat?
Well, the app is quite popular among millennials and the Gen Z population. But all of its most popular features — disappearing messages and stories — have been successfully cloned by Facebook and Instagram.
Worse still, the business has never been — and may never be — profitable.
In other words, there’s nothing really stopping competitors from storming Snap’s “castle.”
And in the game of tech thrones, you build a moat (and win) or you die.
Advertising Death Spiral
Companies that are dependent on advertising require massive economies of scale in order to be particularly profitable.
Not only does Snap need a large number of users who actively click on ads, but it also needs a large number of repeat advertisers who provide them.
If the advertisers see diminishing returns — in terms of clicks and potential sales — they will spend less. And the quality and profitability of the ads will remain low.
Once advertisers decrease spending, their returns from Snap will never increase. Which makes them unwilling to spend more in the future.
It’s a devastating cycle that’s common among midtier advertising platforms. And Snap is struggling to break through it.
The company had promised the ability to place ads between consumer-provided content, making them appear more personal. But advertising completion rates (how often users watch ads all the way through) are running well below projections.
Advertisers are also seeing a lower return on their investments than on rival platforms, according to Morgan Stanley. And sure enough, they’re not increasing ad budgets.
Snap had also promised advertisers an automated bidding platform to place ads, but this is rolling out more slowly than expected. This feature will likely be pushed into 2018.
Making matters worse, as Jonathan mentioned above, Instagram and Facebook have been replicating new features of Snap more quickly than expected. So the increased competition in the space is making Snap’s outlook even more dire.
Now, taken individually, these problems wouldn’t be fatal. But their combination appears to be developing into an advertising death spiral that Snap may find impossible to halt.
Hardware Is (Really) Hard
Back in 2013, famed venture capitalist Marc Andreessen told conference attendees, “Hardware is hard. It’s called hardware for a reason.”
Snap’s CEO, Evan Spiegel, is learning this lesson, well… the hard way.
Months before the company’s IPO, Spiegel tried to diversify into wearables with the launch of Spectacles. These were 1980s retro-looking sunglasses equipped with a camera. This allowed you to snap pictures and short videos that could be instantly uploaded to the company’s social media network.
The early results looked promising, too. So much so that Spiegel completely rebranded the company from Snapchat to Snap and declared it “a camera company.”
That metamorphosis proved to be a bit premature and overly optimistic.
As The Information reports, “Snap badly overestimated demand for its Spectacles and now has hundreds of thousands of unsold units sitting in warehouses, either fully assembled or in parts, according to two people close to the company.”
Instead of catalyzing a new revenue stream to bolster the company’s advertising sales success, Spiegel’s foray into hardware proved to be nothing but a novelty.
In fact, Snap’s internal data reveal that less than 50% of Spectacles owners use the sunglasses after just four weeks. Many users quit using them after just one week.
Such a shockingly low retention rate apparently forced Spiegel to reconsider other hardware launches. Snap was reportedly working on a drone, but those plans have now been scrapped.
At the end of the day, Snap’s hardware problems have become shareholders’ problems. The stock is down 50% from the highs hit right after its IPO. (We warned you, repeatedly.)
Expect more downside ahead. As Ben Thompson of Stratechery put it, “Spiegel is incredible at product, but not so good at business.”
And that, my friends, is anything but the ideal combination for above-average stock performance.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily