SNAPCHAT SHARES DOWN CLOSE TO 25% IN AFTER HOURS TRADING

How did we get here?

Snap reported their earnings after the bell today. At first glance, Snap’s earnings look quite good. They beat expectations for daily active users by 5 million, EPS came in more than twice street estimates at $0.17 a share compared to the estimated $0.08. However, that is where the good stuff ends. Revenue came in at a miss, $1.07 billion versus the $1.1 billion anticipated. What looked worse was the EBITA numbers. EBITA is earnings before interest, taxes, depreciation and amortization. Basically it shows how profitable the company is. EBITA outlook for the fourth quarter of 2021 came in at $135-$175 million. This less than half of what the company was expected to guide for the fourth quarter. Analysts thought that EBITA would be around $300 million.

So now we know what happened, let's try to decipher why the sell off in the after hours was so sharp. We saw that EBITA was down significantly, but I believe the numbers aren't necessarily what drove the stock down. I think the numbers just prove my overall thesis about the short term outlook on technology companies but also show how social media companies are hard to invest for the long term. We have seen this with social media originator, Facebook. It has gotten so bad for the company with constantly being called to the hill and privacy concerns, that they are going to change their name. That's how bad they believe their name has been tarnished. Looking closer at SNAP specifically, we must examine how they make money. Ads. That is pretty much it. Snap doesn't make very much by selling accessories and such - 99% of their revenue comes from ads on their platform. To me, that is not a great way to make money. You can't make more money by selling more ads because users will leave. When your user base lowers you won't be able to charge as much for those ads. Snap should consider themselves extremely lucky that they beat on their active users numbers, otherwise I believe the stock could have halved overnight. Snap gets to charge more money if they have a large user base, but as soon as that user base starts to decline, ad revenue starts declining, meaning their company goes to zero.

All in all, Snapchat must rely on the usability of their app, how cool and hip it stays, because if it becomes a fad and they lose users, it will get ugly. Snap is just not investable. A potential investor relies on the fact that kids will still wake up the next day and use their platform. To me, I don't see kids using Snapchat for the next decade. I don't know why, but then again I don't have to know why. All I have to know is that people move on, they don't use snapchat for the rest of their lives like they might Instagram. For social media companies to continue to thrive they have to be able to predict if their platform will still be the most popular among young people. No one knows how to predict this. That is a problem.

Broadly for Tech Stocks:

I think that this inflationary and high interest rate environment will create some more turmoil for Snapchat and other tech companies in general. Tech companies need a lot of capital to grow and justify their valuations, and when interest rates rise, these companies are directly affected because they do a lot of borrowing.

Overview:

In my opinion, Snap has always been an uninvestable company. It just goes back to how they make money. A business model that relies solely on the revenue of ads is a very thin line that has to be walked. Companies want to sell as many ads as possible, but they don't want to ruin the user experience so much that they drive away users. Combine that with the fact that their average user base is very young adds another factor. Young people move from one thing to another, fads die out in a couple years, young people get bored of things so easily. (including me) I believe Snapchat will not be able to sustain for very long. Snapchat is only as powerful as its user base and if teens grow out of it, the company has no other revenue streams - it will go out of business. Like I mentioned before, it's not like they can sell more ads either. The earnings may elude to the fact that profitability is the issue, but truly the whole business model is the issue. Additionally, if they are having profitability problems too, then it is obvious that SNAP may be one of the biggest companies (over 100 billion dollar market cap!) that is an easy short.