SNAP Back into AR

Dear Wall Street Daily Reader,

Last week, Snap Inc. (SNAP) made a major move into a trend I’ve been hot on for quite some time — Augmented Reality (AR).

More specifically, the company made its largest acquisition ever, plunking down $500 million to acquire WaveOptics, a supplier of critical AR display technology.

But don’t you dare snap up shares of the social media contender to profit from this trend.

You see, there’s a fundamental flaw to Snap’s strategy that promises to undercut any AR profit potential here, among other major risks.

Let me explain…

Hardware is Hard

As famous venture capitalist Marc Andreessen noted long ago, “It’s called hardware for a reason… it is hard.”

Indeed!

Getting a hardware product to market is expensive, time-consuming, and requires significant understanding of multiple physical distribution channels and strategies.

Not to mention, hardware businesses aren’t nearly as profitable as software businesses, which is Snap’s main business, by the way.

But that doesn’t seem to keep the company’s ever arrogant CEO, Evan Spiegel, from trying again and again… and once again today to succeed in the hardware space.

(What’s that definition of insanity?)

Failure 3.0

It’s important to realize that the WaveOptics acquisition coincides with the release of Snap’s third version of its AR glasses, known as Spectacles.

I hate to be blunt, but the first two generations were complete commercial failures.

Consider:

  • Although people bought 200,000 pairs of the first version in 2016, by late 2017, Snap ended up with $40 million in unsold inventory of the devices, which management eventually wrote off as a loss.
  • Meanwhile, the second version of Spectacles, by the company’s own admission, did not generate any material revenue.

Mark my words, the same will be true for Snap’s third version of Spectacles.

How can I be so sure? Because of the simple fact that Snap is exclusively targeting the consumer market, which doesn’t exist yet.

Instead, it’s the enterprise market that’s showing impressive traction and ramping sales for AR devices.

Launching a new hardware business is hard enough. But trying to pivot to attract an entirely new customer base is, well, let’s be fair, impossible.

I wouldn’t put my hard-earned capital on the line to bet that Snap could pull off not one, but two improbable feats. And you shouldn’t either!

Especially when the company is facing stiff and deep-pocketed competition in AR from all the major tech companies.

Google, Facebook, Microsoft, Apple. You name it, they’re all going “all-in” on AR, too.

I Applaud the Effort

To be fair, I get why Snap is even considering the AR hardware market.

After all, the company tried to rebrand itself shortly after its IPO as a camera company, so it’s not a stretch that it should sell cameras, right?

Especially since it seems like such a natural extension of one of its key strengths — innovating compelling AR software filters for use on its social media platform of 500 million monthly users (and counting).

But again, hardware is not that easy.

At the end of the day, Snap should stick to its knitting — which is coding, not developing electronic devices.

But even if it does maintain its focus, I’m still not a huge fan of the stock as a long-term investment.

Why? Because it lacks critical patent protection.

As I’ve noted before, this lack of patent protection allows Facebook (FB) to rip off Snap’s best innovations with impunity. And Facebook does!

Instagram Stories is the most obvious example, but the list (see here) is long.

The end result is that Snap’s network will never grow fast enough to have a chance at catching up to Facebook.

And social media investments are all about the network. The bigger the network, the more upside potential.

Ad revenue, engagement, sales, profits. They’re all derivatives of that one metric.

So Snap’s network will never compare to Facebook’s. And its twice-failed AR device business will never be a market leader, either.

Bottom line: Snap has rightly identified AR as the next major tech trend.

But for investors, it’s targeting the wrong market — and therefore, it’s the wrong company to invest in to profit from the burgeoning AR mega-trend.

Ahead of the tape,

Lou Basenese

Lou Basenese
Editor and Founder, Trend Trader Daily

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Louis Basenese

Louis Basenese is a professional investor, and one of the country’s leading technology analysts.

He’s spent the past 20 years analyzing emerging technologies, and developing a proven methodology to consistently profit from them.

Lou began his investment career at Morgan Stanley, where he was eventually tasked with directing over $1.5 billion in capital.

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