There is no question that Snap (NYSE:SNAP) CEO and co-founder Evan Spiegel is sitting in a better position eight months into 2019. SNAP stock is up 197% year to date through August 14.
More than that, the company just issued $1.1 billion in convertible notes at the bargain-basement interest rate of 0.75%. As my InvestorPlace colleague James Brumley recently admitted, “Snap CEO Evan Spiegel has become a savvy CEO rather quickly, making SNAP stock the compelling prospect it was supposed to be two years ago (but wasn’t).”
When Snap went public in 2017, I wasn’t a fan. Two years later, I’ve found myself predicting that SNAP stock will hit $20 by the end of the year.
Spiegel has done an excellent job focusing the company on monetizing its social media app while at the same time cutting expenses. Don’t get me wrong, I’m not thrilled that it lost $202 million on an EBITDA basis in the first six months of the year, but revenues continue to grow at a significant rate while free cash flow usage is diminishing.
The business is getting stronger in almost every way possible, including the ever-important daily active users, which have jumped 8% over the past 12 months to 203 million.
Take a bow, Evan Spiegel. Thanks to your efforts over the past year, your net worth has risen exponentially.
A Loss of Focus
A piece of earth-shattering news came across the wires August 13.
Team Snap announced the launch of Spectacles 3, the third version of its costly Spectacles sunglasses that capture the world in 3D. Available for pre-order at $380; they’ll begin shipping the sunglasses in the fall.
Remember that focus I was talking about in the intro. The development of Spectacles is the antithesis of focus. While innovation is to be applauded, Spectacles isn’t the kind of creativity that will reward Snap shareholders. Not now, not ever.
“Grossly overestimating demand for Spectacles in 2016, Snap was forced to take a $40 million write-down on all the first-generation units it couldn’t sell… which was most of them,” Brumley wrote in November 2018.
Here’s what I said about Spectacles in September 2018:
“I wish Snap would forget about those ridiculous Spectacles. While the second generation might look a lot better, they’re nothing but a distraction from its real business of selling advertising.”
The crazy thing about the third version is that it’s almost double the price of the second. Sure, Spectacles 3 comes equipped with a second HD camera, but who in their right mind is going to pay that kind of price for two HD cameras?
Perhaps the price increase is meant to ensure the company makes money on each pair sold, but something tells me this fascination with sunglasses is going to end with another writedown.
It’s All About Making Money
I can understand Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) making this kind of crazy bet on 3D sunglasses. It generated $27.4 billion in free cash flow over the past 12 months; it’s got an entire division dedicated to moonshots that aren’t likely to pan out.
Snap’s free cash flow usage over the trailing 12 months ended Q2 2019 is $489 million, down considerably from $914 million a year earlier. It’s reduced its free cash flow usage for four straight quarters, so it’s going in the right direction.
However, I fail to see how Spectacles 3 is going to help reduce that number even further.
Until it’s generating positive free cash flow, investors ought to be suspicious of vanity projects such as this one. They’re a waste of time, resources and focus.
While I still believe Snap stock could still hit $20 in 2019, the company’s insistence on maintaining the Spectacles business portends a potential correction in 2020.
And most importantly, it’s unlikely to make a spectacle of itself.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.