Snap Earnings and the Race to the Metaverse

$SNAP correction is no surprise.

As Facebook will pivot its brand in the pursuit of the metaverse, I’d argue ByteDance and Snap who understand GenZ are the actual leaders of the race to the metaverse. During the pandemic, $SNAP’s price was $10, so how did it go to reach $70? In late September, 2021 it reached $83.

Snap reported it missed revenue expectations in the third quarter on October 21st and is down around 30% in the last five days.

• Snap said that Apple’s iPhone privacy changes disrupted its advertising business.

• It also warned that supply chain interruptions were stifling short-term demand for advertising.

Apple’s privacy tracking changes and Google’s Cookie apocalypse really does reformulate the future of Advertising to some degree.

Evidence that ByteDance and Snap are superior in retaining users and GenZ users is obvious however as compared to Facebook, which has become a legacy brand. For Snap, daily active users coming in at 306 million versus the 302.1 million expected. This is really the key metric to watch for social media companies.

Snap also understands AR, gaming and how peer groups function in a way that Facebook has truly missed. While TikTok understands app-algorithms and viral content in a way that Instagram never reached. So who is really leading us to the metaverse? It’s actually companies like Unity, ByteDance and the corporate metaverse Microsoft is building. I would tentatively add Snap to that list as well.

In late 2021, Snap has warned that global supply chain interruptions and labor shortages reduces the “short-term appetite to generate additional customer demand through advertising.” I’ve felt that in my marketing freelancing gigs.

Snap announced on Tuesday that it’s launching a global creative studio to help brands develop augmented reality (AR) advertising and experiences. The new studio is called Arcadia and aims to help companies develop experiences that can be used across web platforms and app-based AR environments. Snap is truly innovative from a product standpoint, even if they don’t have the AI or marketing chops of ByteDance (who have way deeper pockets). TikTok is an app by ByteDance.

Here’s what Snap reported versus Wall Street’s estimates:

• Adjusted earnings per share: 17 cents vs. 8 cents by Refinitiv

• Revenue: $1.07 billion vs. $1.10 billion forecast by Refinitiv

• Global daily active users (DAUs): 306 million vs. 301.8 million per StreetAccount

• Average revenue per user (ARPU): $3.49 vs. $3.67 per StreetAccount.

Arcadia will function as a division of Snap and have the creative freedom to operate independently and help brands create AR experiences, not just for Snapchat but for other social media platforms as well. So that’s a B2B AR engine for revenue generation.

Facebook already has more than 10,000 employees building consumer hardware like AR glasses that Zuckerberg believes will eventually be as ubiquitous as smartphones. They will rebrand their company name under the Metaverse banner, but there’s scant real world evidence Facebook understands what the Metaverse will actually become. Facebook’s Horizon Worlds is vastly inferior to Unity. Facebooks is notoriously bad at creating new products, or even new apps for that matter.

Snap actually builds cool stuff. The new iPhone privacy settings impacted Snap’s advertising business more than anticipated. Snap has been pivoting their entire lives guys. Though even down 23% today, the stock is still majorly overpriced. The concept of the Metaverse cannot be forced, it has to emerge form GenZ digital and consumer habits. It wont’ necessarily evolve from an Ad-centric business model of legacy internet brands like Facebook or Google.

In an earnings call Thursday, Snap said that it failed to meet revenue expectations for its third quarter. Snap reported $1.07 billion in Q3 revenue, missing Wall Street’s hopes that the company would bring in $1.1 billion. It’s not as if this is an epic failure.

That Snap even exists in a duopoly Ad world of Google and Facebook is astounding. They have created an app where GenZ has grown up in, with features that are useful to real life and peer groups and personal branding. It’s made Instagram look like a cookie cutter trend of the previous decade, and TikTok has cemented Instagram’s demise.

The metaverse is about young people and this is why Facebook cannot build it. Don’t be fooled, Mark has lost his way. Peter Thiel set him up to be an Oligarch of technology and that never ends well. Evan Spiegel is a product genius not unlike the founder of ByteDance. They are cut on different cloth.

At this point it would make sense for Apple to acquire Snap, due to their AR proficiency. However that’s unlikely to happen.

The Market cap of this company isn’t really $117 Billion is it? A Forward P/E of 95? Give me a break. As good a company as Snap is, it’s intrinsic value places the stock at barely a $20 once the stock market corrects. They are still burning cash, Sales are just $3 billion. They have a bit less than 4,000 employees. This is no giant of the Metaverse like ByteDance has become.

Snap is a little fish in big world, an advertising based internet in the U.S. that has been completely monopolized, the Silicon Valley oligarchy. Even as Amazon and ByteDance steal advertising share globally, the Twitters, Pinterests and Snaps of the world can barely expect huge gains.

Snap can’t base its future on advertising alone. Snap sees adjusted EBITDA coming in between $135 million to $175 million. And even on the high end, that was a big miss compared to Wall Street's expectations for $299.3 million. Snap has never been a financially sound company. Who wants to run blind Ads? Without the wide view that many advertisers were accustomed to, they had to adapt to new, more restrained ways of measuring user behavior.

The simple reality is if you give consumer a choice, unsurprisingly, most people opt out of cross-platform tracking that ad businesses like Snap and Facebook rely on when presented with the choice. And this is important since unlike Facebook’s leadership, Spiegel has consistently been supportive of Apple’s decision to build more privacy into its mobile operating system in spite of how those changes might affect Snap’s bottom line.

Facebook’s metaverse is trying to hold on to the past, while ByteDance and Snap are moving with young people into the next digital reality. By copying Facebook’s post style and focus on Ads, LinkedIn is also trying to re-create the past. So what?

It means Snap’s stock isn’t worth touching until it corrects to pre-pandemic levels. The company’s true value is between a price of $15 and $20. To think otherwise is just foolish investing. On a global level is 300 million users even that great? What saves Snap is that its daily active user base are in lucrative countries and regions, the rich kids.

Snap shares had been up 50% so far in 2021 which is ridiculous. There will be more pain ahead for the price, while I’m positive about the company’s ability to innovate, the inflated market means this is a prime candidate to suffer from Metaverse blues. The last time I bought Snap it was $8.

Let’s not forget Snap had a good run, their share price rose by an impressive 1,000% plus from $7.00 per share in 2018 to trading around $75.00 per share until just recently. That simply wasn’t realistic. Buying a company at 200x earning is just dumb.

Snap faces absurd competitive pressures like TikTok and Instagram. Older generations rarely use the platform so that excludes, as of this date, a majority of people. It doesn’t even matter how innovative the company is when it faces bottlenecks this big. And that’s a huge problem for the stock price.

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