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22 September 2017

Troublesome hardware. Snap Inc. is admitting that it made a wrong turn with its spectacles

With the reorganisation of its hardware division, Snap Inc. is admitting that it made a wrong turn with its spectacles which despite being cool, no one bought. Steve Horowitz will now become president of technology and report to the chief strategy officer rather than the CEO in what can only be a significant demotion, while a large part of the marketing effort has also been terminated with the COO of hardware, Mark Randall presiding over the vestigial remains.

Despite being viewed as pretty much the coolest wearable device available, Snap Spectacles only managed to rack up around $5m in revenues during Q2 17. This clearly indicates that hardware was running at a substantial loss and with no turnaround in sight inevitably resulted in the cuts we have just witnessed. All references to becoming a camera company have now been quietly deleted leaving the company at a dead end when it comes to hardware. As Google and Facebook are finding, doing hardware when one is a software company is much more difficult than it sounds and we would not be surprised to see Snap quietly drop this idea completely.

This leaves Snap with little differentiation over Facebook which remains its biggest problem. Instagram has a habit of copying all of Snap’s best innovations and pushing them out to its much larger user base pretty quickly. This makes it extremely hard for Snap to compete as apps that offer communication are all about the network of users.

Metcalf’s Law of Networking states that the utility or value of a network increases by the square of the number of devices attached to it which would imply that Instagram should be at least 16x more valuable than Snap meaning that at Snap’s valuation, Instagram makes up more than half of the valuation of Facebook. Instagram is an important part of Facebook but I don’t think it is contributing more than 50% of Facebook’s value. Hence, I would be inclined to believe that Snap remains meaningfully over-valued.

Fair value for Snap remains around $12.40 per share which is still 10% below where the shares are today and negative sentiment could push the shares closer to $10 at which point acquirers could start to take interest. Until then we still see no reason to get involved and would strongly prefer Twitter to Snap Inc.

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