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An Open Letter To Snap Ahead Of Its IPO

An Open Letter To Snap Ahead Of Its IPO

Dear Snap, Inc.,
Congratulations on your S-1 filing this past week.  It’s a great accomplishment as a company and great for the tech industry.  During our 35+ collective years as stock analysts, we’ve helped a lot of companies go public.  We know you have great banks working on your deal that will give you good advice, but we thought we’d share our most important learnings about how the best companies handle IPO’ing and being a public company.
  • Manage Expectations.  Set an achievable bar for revenue and earnings and stick to it.  Obvious, but easier said than done.  You want to be Bill Belichick (go Pats), not Rex Ryan here.  We’ve seen too many companies agree that this is the right approach, only to miss a quarter out of the gate or within the first year.  The easiest quarter to get right should be the first one out of the gate, your first quarter as a public company.  If you miss your first quarter out, you’re in for a year of buy side investors disbelieving everything you say and you’ll have to slowly rebuild your credibility.  We believe it’s better to take a slight hit on your valuation at the IPO with conservative numbers you have a very good chance to beat than more aggressive numbers you think you might hit, but aren’t 100% certain.  The slight hit to IPO valuation may not even happen because smart investors will work through your conservative numbers and recognize that you understand the game.
  • Guidance.  Give some level of guidance because it will make your life easier.  Every great tech company takes a different approach to guidance.  Neither Google nor Facebook offer formal quarterly or annual guidance, but both occasionally give directional color.  Facebook more than Google.  An example is Facebook’s policy of offering verbal expense growth guidance quarter-to-quarter.  Both Apple and Amazon offer one quarter out guidance for total revenue and the ability to work toward an operating number.  Microsoft offers one quarter out guidance with segment level detail as well as high-level thoughts for the full year.  Tesla also offers one quarter out color on units shipped with a full-year expectation.  The bottom line is this: guidance gives you the ability to influence the conversation around your numbers, particularly as a new company, so we think it makes sense to offer it.  When we were analysts, we always had a lot of positive feedback on how Microsoft handled guidance and we didn’t even cover that stock, so a quarter out with a little color on the full year will make investors happiest.  We’d recommend the full-year color be high level and about things you directly control (expenses, CAPEX, product launches, etc.) without commenting on revenue.  One additional thing we’d suggest around guidance, while not formal, is to directionally explain the long-term model (5+ years out).  The company is investing heavily in product and talent, thus operating at a loss today.  What do operating margins look like in 5 years?  Should we expect Facebook margins?  This leads in to the next suggestion…
  • Paint The Long-Term Picture.  While every great tech company treats guidance differently, they treat talking about the long-term the same.  Explaining the long-term strategy brings in long-term investors, not all that dissimilar to pitching venture investors.  Hedge funds and traders might move your stock day-to-day, but long-term investors will shape your stock chart over years.  Facebook and Google are among the best at painting the long-term picture of their businesses.  Facebook explicitly updates its 3, 5, and 10 year plan every earnings call, which tends not to change much, as it shouldn’t.  Google tends to speak more thematically and has been emphasizing AI and machine learning as the future of their business over the past several quarters.  Use your time with investors on the roadshow to explain what it means to be a camera company and why that’s important for the future because text is dead.  Explain how this is good for advertisers.  Incorporate AR into the discussion.  The camera is the basis for computer vision.  Lenses is emerging as a product to do interesting things with AR in the near term and Spectacles are the most usable AR product on the market today.  Tell investors how those products evolve over the next few years.  Facebook’s 3/5/10 window presentation is the cleanest and would suggest something similar.  It’s not like they haven’t borrowed from you before.
  • Optionality.  All great tech companies have optionality to their stories.  We define optionality as key products or services that have little to no direct revenue contribution today, but do have the potential to be significant in the future.  Usually stocks with optionality are rewarded with higher multiples.  Some examples: Amazon with Alexa and original content, Facebook with VR and Messenger/WhatsApp, Google with Waymo and Cloud, Tesla with Powerwall/Powerpack and Solar City, Apple with the car and AR.  Snap’s optionality story is probably in AR wearables.  As noted above, Spectacles are the most usable AR product on the market today.  They focus on one simple feature: the camera.  Give investors enough of your vision here so they can dream about the future.
  • Our final piece of advice may contradict everything we wrote above, but don’t worry too much about the stock.  The best companies we’ve covered rarely talk about the stock price.  It’s always about the business, the near-term milestones, and the future.  When you get those right, the stock takes care of itself.

    We’re excited to see a new public tech company and wish you a road more similar to FB than TWTR.

    Good luck,

    Loup Ventures

    Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.  

    Amazon, Apple, Artificial Intelligence, Augmented Reality, Facebook, Google, Snapchat, Virtual Reality
    4 min. read Show less
    What Apple’s Results Tell Us About The Future

    What Apple’s Results Tell Us About The Future

    As the company that helped pioneer our mobile-first world, Apple’s results from the quarter ending in Dec. 2016 tell us a lot about where the world is going. In short: we still live in a mobile-first world, but the company is driving towards a future where natural user interfaces (e.g., Augmented Reality) replace the smartphone as the dominant computing platform. Apple is innovating towards this future and focusing its efforts on their Services business, which will be increasingly important once the smartphone is no longer our primary computing platform. In the meantime, the company continues to execute on the still-growing iPhone business. Below, we look at Apple’s most important businesses and explore what the data points from the present indicate about the future.

    iPhone: Units of 78.3M in the Dec-16 quarter were better than Street expectations of 77.4M. Sell through was up 8% y/y vs. reported unit growth of up 5% y/y. The iPhone 7 Plus was the star of the quarter, driving ASPs to an all-time high of $695. The previous high was $691 last December. We continue to view the iPhone 7 Plus as Apple’s most powerful driver in establishing a lead among devices capable of doing augmented reality for a broad user base. In other words, the iPhone 7 Plus shows us how Apple will transition from a mobile-first company to a company with a strong position in an AR-centric world. We foresee a time in the next 10 years when AR-capable wearables eliminate the need for a smartphone and, at this time, Services revenue will be even more important. For now, most wearables are dependent on a smartphone, so these devices will help sustain iPhone sales and drive wearable sales for Apple.

    Services: Apple’s Services business (App Store, iTunes, Apple Music, etc.) was up 18% y/y to $7.2 billion vs. Street expectations of 17% y/y growth.  The current Services run rate makes puts the business on par the size of a Fortune 100 company, Apple’s stated goal for FY17. Tim Cook said that he expects the Services business to double in the next four years, implying annual growth of about 19%. If Apple achieves this Services revenue goal, we estimate that the business line would make up about 25% of total revenue, which may be enough for investors to revalue Apple as a service company.  This revenue is very important as mobile devices become less important and AR-capable wearables become the dominant computing devices. We envision maps, navigation services, gaming services, communication services, and many others, which will help the company deliver an integrated (easy to use) wearable experience in an AR-centric world.

    iPad & Mac: Both categories saw units decline y/y in the December quarter. We see this as a sign of how powerful the smartphone is today.  While we believe the Mac remains a key focus area for Apple, which continues to gain PC market share, perhaps we don’t view iPad as a focus.

    Other Key Metrics: While revenue from mainland China was flat y/y (up 6% FX-adjusted), overall revenue from all of China was -12% y/y (down 8% FX-adjusted). iPad units saw y/y growth in India and China. Cook indicated that he is optimistic about tax repatriation, which increases the probability of a larger share buyback at some point in the next two years. Over 90% of Apple’s cash is held offshore. Gross margins were at the high end of the guidance range for the Dec. quarter (38.5% vs 38-38.5% guide) and Apple ended the quarter with $150B in cash, net of debt. Guidance for the quarter ending Mar-17 was $51.5B-$53.5B vs. the Street at $53.8B. This implies iPhone units should be up around 7% y/y next quarter, which is about the same as the sell-in number during the all-important holiday quarter. This is made possible by soft y/y comparables in the Mar-17 quarter.

    Based on what we know today, Apple recognizes that the smartphone market will not grow forever and will eventually be replaced by AR-capable wearables. They are innovating in the AR user interface area, developing mobile augmented reality systems, as shown by the patent detailed by AppleInsider earlier today. At the same time, the company needs to transition their business to be more Services driven. The iPhone platform can move from a mobile platform to an AR-enablement platform, but once the AR-capable wearables are no longer dependent upon a supporting smartphone, Apple’s Services business will be critical. For now, we think the company is making all the right moves to transition into and emerge a leader in an AR-centric world.

    Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.  

    Apple, Augmented Reality
    3 min. read Show less
    Google Moving From Mobile-First World To AI-First

    Google Moving From Mobile-First World To AI-First

    Key Message from Google’s Earnings Call: AI-First. On tonight’s Q4 earnings call, Google CEO Sundar Pichai reiterated that we are quickly moving from a mobile-first world to an AI-first one.

    “Looking to the future, the next big step will be for the very concept of the ‘device’ to fade away. Over time, the computer itself — whatever its form factor — will be an intelligent assistant helping you through your day. We will move from mobile-first to an AI-first world” – Sundar Pichai

    We couldn’t agree more. As we detailed in our recent piece, The 5 Focuses, Google, Amazon, and Apple have all made artificial intelligence a core focus. AI touches most of the Internet products we use from the tech giants. From a user standpoint, AI makes products better and more effective. It makes them more of a joy to use, meaning we spend more time with them. From a financial standpoint, AI-enhanced products mean consumers spend more money. For Google, more time spent is more opportunities to show relevant ads. For Amazon, more time spent means more opportunities to unearth products the consumer didn’t know about, but might want to buy. For Apple, more time spent means more opportunity for them to provide you with their emerging Services or time to prove the value of your device and retain you as a loyal upgrader.  

    AI Transition Risk. A problem for Google will be figuring out how to monetize the artificially-intelligent evolution of search. The shift to an AI-first world means that the 10 blue search results links may go away, which will have negative near-term consequences for Google search monetization, just like the shift from desktop to mobile. Eventually, AI will be a positive for the Google story.   Thinking about search over the past two decades, we’ve gone from PC to mobile to voice interfaces. On PCs, our large screens meant we saw all of the sponsored links and shopping results and most of the 10 organic links, if not all of them. On mobile, our small screens mean we see at least a couple of sponsored links and maybe a few organic links. Google was successful in maintaining monetization of its core product even as it moved from large PC screens to small mobile screens, although it had to work out some issues with click prices during the early transition. It’s hard to say what the future might look like for voice interface, but Google has a track record of adapting to new interfaces, and our bet is that AI search will be a better user experience and monetization opportunity. 

    Amazon, Apple, Artificial Intelligence, Google
    2 min. read Show less