Snap 2017 vs Facebook 2012: Big differences

Markets flattish to down again today. Not sure we’re headed for an immediate correction, but the upside does seem a bit exhausted for the near-term at least. Drug stocks getting hit on Trump talking about pricing. Pandora getting smashed again today, as has been the case lately. I think it’s headed lower still. Same with Valeant, which has fallen from above $200 and almost single digits now. Wow. Meanwhile, Impinj is also getting hit again and has been weak since its earnings report. I might look to nibble a little more on that one closer to $25 or so, but am not in a rush, as you guys know.

Let’s snap to Snap again.

Snap has been wild since it came public in a wild IPO. And I keep getting asked about it, in large part because long-time readers know that I waited patiently for Facebook to drop 40% from its IPO price before I started buying Facebook common stock and call options when the stock was at $25 and I made it “one of my top three largest positions.”

My subscribers and I have owned it ever since.

So let’s step back in time to summer 2012 when I repeatedly laid out the long-term bullish case for Facebook and why I called it “cheap” back then and compare that analysis to our Snap analysis today.

Difference #1 – I loved how Facebook immediately dropped after its IPO, as in the very first day, because Facebook sold as many shares at the highest possible level Wall Street could tolerate when the company sold shares to the public in the IPO itself. Meanwhile, Snap flunked its IPO test saw its stock pop 50% when it opened for trading after the IPO last week, meaning the company could have raised more than $5 billion instead of just the $3.4 billion they raised to put on their balance sheet and run their company for the long-term.

Difference #2 – The big and immediately sell-off in Facebook’s shares after its IPO gave us the chance to buy the stock 40% off its IPO price when I did start buying it. Snap would have to be at $10 per share to be 40% off its IPO price.

Difference #3 – Facebook was profitable and expected to grow earnings immediately. Snap is losing hundreds of millions of dollars per year and expected to continue to lose money for the next couple years at least. As I wrote about Facebook at the time, ‘The analysts are still estimating  an average 54 cents of earnings for this year and 65 cents for 2013.  That means, I’m buying a company a soon-to-be must-own for every tech mutual fund and money manager’s portfolio that just came public for only 25x next year’s earnings.”

Difference #4 – Facebook’s price to sales ratio was 20x back in 2012. Snap’s price to sales ratio is closer to 50x right now. Snap would have to be closer to $10 per share to be at 20x.

Difference #5 – Facebook already had close to 1 billion users on their platform when it came public, having fully established critical mass. Snap’s user base is huge and growing but at 1/3 of a billion users, it’s still a long way from Facebook/Whatsapp/Instragram-like critical mass. I do think Snap could get close to a billion users in another few years, but that’s a risk that we didn’t face with Facebook back in 2012.

Difference #6 – I was a screaming bull and aggressively net long stocks in my portfolio back in 2012. Today I’m still generally bullish about the Bubble-Blowing Bull Market overall, but I am much less bullish in 2017 with the markets having doubled and tripled already since the summer of 2012. I’ve raised cash slowly over the last couple years and have added some short hedges vs having been aggressively net long stocks and even regularly buying call options back in 2012.

Similarity #1 – If Facebook could figure out how to generate just a few cents per of revenue per day per user, the revenues would grow quickly enough to make its current price to sales ratio irrelevant. As I explained about Facebook back in 2012:

“Facebook says 900 million monthly-active-users (MAUs), a 33% jump from the year before. Let’s say that Facebook’s explosive MAU growth slows by a third to 11% for the next 5 years, that would give Facebook 1.5 billion engaged users. Divide that $20 billion in revenue by the 1.5 billion users and at a multiple of 10x sales, you see that if Facebook generates $13 in revenue per user per year (that’s about four cents per day, per user), it’d have a $200 billion market cap.”

Rewritten for Snapchat today: Snapchat says they have 300 million monthly-active-users (MAUs), a 45% jump from the year before. Let’s say that Snapchat’s explosive MAU growth slows by a third to 15% for the next 5 years, that would give Snapchat 600 million engaged users. Divide that $10 billion in revenue by the 0.6 billion users, at multiple of 10x sales and you see that if Snap generates $13 in revenue per user per year, it’d have a $78 billion market cap.

Snapchat’s also selling hardware like Spectacles and will be a very different company than Facebook or any other “traditional” social media company out there. (Wasn’t long ago that traditional social media was an oxymoron, huh?)

All right, so here’s the upshot then. I’d like to buy Snap if the stock were to fall below its IPO price, maybe even into the lower teens at which level I think there’s enough potential upside to offset the risks. I sure wouldn’t bet against Snap, but I don’t have to buy it right now either.

Here’s more from some of those articles I wrote analyzing Facebook back in 2012, as I think they contrast interestingly with today’s analysis for Snap and the broader markets too.

Why Facebook is a screaming buy (June 6, 2012)

This week I added two new stocks to the Revolution Investing portfolio, including the now much-maligned Facebook, FB. Because as I see it, the IPO was a raging success and because it was such a success, it has made investing in Facebook here much cheaper than it would have been otherwise.

Now I know the gist of what you’re shouting as you read this:

“Facebook’s IPO was the biggest flop of all time! Morgan Stanley sold too many shares at too high a price! Nasdaq screwed up the execution so badly Facebook is switching to NYSE!!!”

Well I’m here to tell you that Facebook’s IPO was bad for some, but absolutely not for Facebook FB .  Let’s consider a tech IPO that everyone agrees was a ‘success’, Linkedin LNKD .  The professional social network was basically the first Web 2.0 company to go public.  Here’s the Marketwatch headline from May 19th:

LinkedIn’s stock soars in IPO
Shares surge, valuing company at roughly $8.9 billion
May 19, 2011|Benjamin Pimentel, MarketWatch
SAN FRANCISCO (MarketWatch) — Shares of LinkedIn Corp. more than doubled Thursday in a strong public-trading debut, highlighting investors’ pent-up demand for ownership in a new class of social-networking companies.

Some people might call it a success, but I call that IPO doubling on its first day a complete disaster. Flip it! Because what this really means is that Linkedin left about $4.5 billion dollars on the table.

Think about it,  if the stock popped so much on the first trading day that means that Morgan Stanley and Bank of America vastly under-appreciated what investors would pay and how much stock they would want.  Companies going public, especially buzzy tech ones, have put up with this devil’s trade-off for years: you let your underwriters sell the stock on the cheap to Wall Street insiders so they can keep the client base happy that you need to pull off a large offering.  And Facebook totally flipped that table over on Wall Street’s head by squeezing every last dollar out its IPO.

Instead of letting its enormous group of underwriters hand their clients free money, Facebook upped the size and price of their offering at the last minute.  So now the shareholder base isn’t the flippers and sellers that typically accompany an IPO, it’s enormous mutual funds like Fidelity and Blackrock that have to own Facebook and long-term investors.  And all  the underwriters, which include everyone on the street, from Wells Fargo to Goldman Sachs to Citigroup just has to deal with it.  Yes, the little guy that bought through E-Trade on the first day has taken a hit too but since they don’t have to deal with the pressures of running money like high-water marks, the ones who are still holding on after such nastiness are likely very long-term shareholders.  If you’re getting long Facebook now, you’re doing so at 40% below its first tick as a publicly traded company.

And more importantly, I’m buying Facebook because it now boasts one of the most pristine balance sheets out there and it’s suddenly looking very cheap. Yes, Facebook is cheap at $26 a share. Here’s why.  The proceeds from the IPO are around $16 billion.  With a market cap of about $63 billion that means you’re buying in at just around the valuation Goldman Sachs GS invested at ($50 billion + what’s now in the checking account) in it back in January of 2011.  With just over two billion shares outstanding that means Facebook has about $8 of cash per share.

The company is quite definitely cash flow positive and will be for the foreseeable future, and that means you’re actually buying the stock at only $18 a share, when you include that $8 per share that the company has in its checking account because of that hugely successful IPO they just pulled off. The analysts are still estimating  an average 54 cents of earnings for this year and 65 cents for 2013.  That means, I’m buying a company a soon-to-be must-own for every tech mutual fund and money manager’s portfolio that just came public for only 25x next year’s earnings.

I am stepping in and buying both some common stock, as I instructed my Revolution Investing subscribers at MarketWatch to do and some longer-dated calls in FB as I detailed on me separate service,  TradingWithCody.com. I think Facebook is one of the best trading setups right here right now that I’ve seen in a long time. Much of the current sell-off is because the IPO price has been “broken” and all the speculators from the IPO are still trying to get out of it. That’s a technical force in the markets that is likely giving us a great opportunity to buy this stock cheaper than we’ll ever see it again for a very long-time. It might take a week, and it might take a month, so give yourself a little room if you’re doing the trade too, but I do think FB at $26 a share in June 2012 will turn out to be a very good buy.

Getting long a stock no one else likes is hairy business, and if it goes down 20% from here you won’t get any backslaps or high-fives at cocktail parties.  As I’ve pointed out before, buying Microsoft in the months after the IPO wasn’t easy either, but those who held on for the long-term have done better than almost any other class of investors in the last 30 years.  The comparison is apt.  Microsoft was the operating system for the PC revolution; Facebook is the operating system for the cloud/app/mobile revolution and isn’t going anywhere anytime soon.

Finally, do you know anybody who’s willing to stick their neck out and buy FB now that it’s come public in a wildly successful manner for the company’s balance sheet but has sold off 40% from it’s opening tick? No? Nobody has any confidence in FB right now? I’ll bet they will have confidence when the stock is higher. I’d probably rather be a seller at that point — buy low, sell high is the idea, right?

Facebook just pulled off one of the greatest shorts in the history of the market — they sold their own stock high and got the proceeds for it and now we can buy it in the aftermarket for cheaper than the insiders were getting it for a year and a half ago when it was a fraction of the size it is now.

……….

How Facebook gets to $100 per share (July 23, 2012)

Much of the speculation about Facebook has been whether it can monetize the enormous traffic growths its seeing from mobile devices, whether its Apple’s iPhone or a Google  Android or a Research in Motion Blackberry (yes, those are still out there).

The idea is that desktop Web traffic is the most valuable to advertisers and ad agencies (like early Facebook investor IPG), and that kind of traffic is in perpetual decline.  Which makes some sense right? I’m with my phone basically 24 hours a day, if I’ve already checked Facebook on mobile, I don’t need to when I sit down at my trading station.  That Facebook hasn’t yet perfected the mobile advertising game is pretty well accepted on Wall Street and in the media.  Check out this Forbes article from the awesomely-named Chris Versace:

“Even Facebook CEO Mark Zuckerburg has admitted that his hardest job right now is figuring out how to adapt Facebook to mobile devices in part because the user experience is so different than on desktop computers. How can a website or an app offer advertising on a 2-inch by 4-inch screen and still offer a great smooth experience for users. Some simple math and we realize that the vast majority of advertising revenues are generated from those non-mobile users. But the shift toward mobile devices is accelerating at a time when PC demand, particularly in the U.S. is slipping and that does not bode well for Facebook. During Q2 2012 smartphone penetration continued to grow, with 54.9% of U.S. mobile subscribers owning smartphones as of June 2012. The risk is more people accessing Facebook on the go than at the PC, not a good thing for the company’s PC centric display advertising business model.”

We’re going to do some simple math of our own in a second, for which we need to look at that mobile argument.  What I’m saying is that you want to own Facebook because that’s the platform everyone is consuming and sharing content on, whether through desktops or mobile or hologram or augmented reality glasses.  If the entire world stops using PC’s as their primary way to access the web, wouldn’t you want to be long Facebook, a company that is growing tremendously in a tremendously growing market? And any new technology platform that emerges, you can be sure it will be used to check Facebook plenty.  It’s not on the table that mobile engagement on Facebook is going down, in fact everyone agrees it’s going up, even as it maybe decreasing the hours/month users spend on Facebook.  The issue the pundits have is that it’s a different and new kind of engagment.

And my argument is that different engagement is way, way better.  Right now Nielsen and Arbitron make money by telling content creators, advertisers and distribution platform their best guess of what users are doing based sampling .  Do you know why CBS, Disney and Newscorp  and Comcast, General Electric or whatever its called hold upfronts the third week of May? Because GM and Ford rollout new year models in the fall and they’ll need to advertise on those new fall shoes. Did you miss out on The Colbert Report while DirecTV and Viacom battled over retransmission fees? Relieved you finally have AMC’s Breaking Bad back?

In 2012 these vestigial bad habits are going to be thrown off quicker than anyone realizes and Facebook is a big part of that.  Why would NBC need to be at the whim of Nielsen’s set top boxes to call a show a hit when they can just see how many people, and exactly who, were sharing and liking talking about America’s Got Talent on Facebook? And if consumers stop watching TV in their living rooms, advertisers will have no choice but to engage them on mobile platforms, and those ad rates will spike big time.

The promise of Facebook is that you know exactly whom you’re showing an ad to, exactly how they engage with it, exactly how influential they are. Heck the very idea of an ‘ad’ is going out the window, if one of the 2.4M people who likes Papa John’s Facebook page shares a post with their 500 friends and 2% of them share it with their friends, how many ads is that? And sharing shouldn’t even fall under the old internet CTR ad model rates, it’s active engagment and many times more valuable than just clicks.

So here’s that math I talked about before and how Facebook FB gets to a $200B market cap.  Their valuation right now is just under $70 billion.  Last years’s revenues were about $3 billion so that’s 22x sales, let’s say 20 for good measure.  Facebook says they have 900M monthly-active-users (MAUs), a 33% jump from the years before. So let’s say the prices/sale  multiple holds over the next 5 years, that would mean Facebook would need $10 billion in revenue to get to a $200 billion market cap. But let’s halve the multiple to 10x sales, so we’re looking for $20 billion in sales.  And let’s say that explosive MAU growth slows by a third to 11% for the next 5 years, that would give Facebook 1.5 billion engaged users. Divide that $20 B in revenue by the 1.5 and you get that at that depressed multiple of 10x sales, will anemic future user growth, if Facebook generates $13 in revenue per user per year, it’s at a $200 B market cap.

Let’s make that even simpler — that’s about four cents per day, per user.

Everything I just stated is the bear case, and about half what I expect to materialize, but generating 4 cents per user per day, by connecting engaged users with advertisers, is not that hard.  And if Facebook needs some time to evolve their strategy  or shift the thinking of advertisers and agencies to the mobile reality, good thing they have billions in the bank from the IPO.

No changes to my Facebook strategy, as I’ve already built into one of my top 3 largest positions with lots of upside leverage via a wide range of longer-dated calls.

At any rate, I wanted to be the first to point out how astonishingly little revenue per user per day this company needs to generate to get that kind of a valuation.

Cody back in real-time in 2017. We don’t have to swing at every pitch. Patience is key to long-term success, as is weighing risk vs reward. There’s a lot of value in analyzing why we don’t buy a stock sometimes and it’s certainly insightful to compare Snap today with our old analysis from Facebook that we are fortunate enough to be able to go back and look at. Make sure you keep notes about why you personally buy or choose not to buy stocks too, by the way.