SNAP: Don't Miss the Inflection Point -- Pivotal Research Group

User growth has prospectively turned the corner and estimates seem too low amp8211 We are confident the Android launch at the end of Q1 is doing well but likely anticipated by the buyside based on third party data Less appreciated based on our industry checks we think the latest launch of lenses is among some of the most impressive product innovation we have seen in some time from the company This in our opinion constitutes real innovation in Augmented realityAdvertising we think is moving in the right direction amp8211 we continue to hear glowing things about the organization under Jeremi Gorman and suspect that quarter at 2h19 are shaping up well As we framed in our initiation based on our experience there is an important dynamic in online advertising that is under appreciated by the street When there is a change in senior sales leadership you have a 34 quarter window to make amends for mistakesmisexecution under the prior regime Particularly true when you have strong relationships to leverage That we are already seeing better focus on ad agency relationships and a categoryfocused sales team amp8211 exceptionally lowhanging fruit suggests alignment is moving in the right direction Our checks have been more around the large brandsagency part of the business and positive but selfserve both domestic and internationally should be incremental as wellMedia buyers amp8211 for right or wrong can be fickle and SNAP is underpenetrated on media plans We actually think the negative narrative that happened post IPO coinciding with FB competition the slowdown in user growth and multiple quarters of missing estimates likely lead to some potential advertising buyers concluding that they didn39t need to add SNAP to a marketing plan amp8211 it was no longer the shiny new toy In our view that dynamic flows in both directions and we suspect that it will hold true on the upside as well amp8211 particularly heading into the seasonally stronger 2H of the year To the extent there has been a tenor change in the business this can serve as a catalyst underappreciated by investorsIf we are right on the our topline and user conclusions it will be happening on the backdrop of a much more rationalized coststructure amp8211 We think a more important part of the argument of the bull case will be around topline and user metrics but the prospective incremental profitability will be impressive We are at 55 gross margins for 2020 vs the street at 53 We have total costs accelerating next year as we suspect the company will lean into Sales and Marketing in particularCall options in both gaming and an offnetwork strategy amp8211 we are in early innings with regards to both of these initiatives announced at partner day Social gaming is likely a good fit given the younger user base and we like the interactive element of it We are a little less convinced on the offnetwork strategy as it can trade off zeroTAC dollars for those laden TAC amp8211 maybe premature given they likely are undermonetized on OampampO but it could still be incremental If the core business is performing well having call options will serve as another reason for the business to rerate higherWhere we could be wrong 1 2H18 turn was a false positive and momentum tapers out on tough comps 2 misexecution from the sales reorg 3 Android and other recent initiatives are a flop 4 a bigger than expected investment cycleRISKS 1 Over saturation of online marketing within overall ad budgets 2 macroeconomic deceleration causes greater than expected declines in advertising 3 user growth slows faster than the street expects 4 limited user growth limits the amount of real upside prospective pricing pressureFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE SNAP 6619pdfClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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SNAP: Don't Miss the Inflection Point -- Pivotal Research Group

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Michael Levine

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SNAP: Don't Miss the Inflection Point -- Pivotal Research Group

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