SNAP PINS TWTR Market Efficiency Play Pt 1
Comparative Analysis
SNAP currently has a market cap of 21B, PINS 110B, and TWTR 23B. SNAP has a net income of just under -11B, PINS the same, and TWTR became wildly profitable in 2018 netting over 1B. This last quarter TWTR dropped 20% due to weak earnings.
Social media platform success is largely due to the network effect of your platform, which means as more users join the better the platform becomes.
FB has an excellent network effect, TWTR does as well since it's an information platform, the more opinions/content creators the better. TWTR has established itself as a unique form of social media, concentrated on information sharing. It has a unique competitive advantage to other platforms given the structure of its platform, made for short and quick text, easy to scroll through, and easy to share with others. For this reason, it is a great place for viral news and media to post, as well as opinionated statements. The risk in the TWTR platform is the difficulty to advertise to users, this is a challenge that TWTR must figure out moving into the future, however looking at the improvements in their bottom line over the last 5 years, they seem to be moving in the right direction.
PINS has a solid network effect, users create a "virtual corkboard" of ideas and interests, their feeds are then made up of pins similar to their own interests. The more data and users PINS has to create pins, share pins, and collect data on the better their service will become and more ideas will be able to be shared. Although they blew through over 11B in the last year, they have just begun investing heavily in their advertising platform, which has proven to be very successful for advertisers so far. Given the type of content that is put on there (sharing cool things and interests) it makes it a prime location to advertise to the users. As they gather more data and improve their targeting abilities, they will likely follow a similar, if not more accelerated track to profitability than TWTR over the last 5 yrs.
SNAP on the other hand has a weak network effect. I cannotsay that it doesn't have some form of network effect, but since all of their key features (stories and feed) are easily replicated by competitors, there is not much of a reason to keep the service. The unique proposition is disappearing photos, which is a novelty at best, it gets old. They are experiencing growth internationally, but their only way of driving profitability is to stop spending on R&D and lower their SGA expenses. If they invested $0 in R&D last year they still would have lost money. Seeing as they rely on gimmicky new features like fancy filters, their R&D spending will not slow in the future, and in order to run a profit at their current expense levels that would mean more than a 2x increase in gross profit. Needless to say, SNAP will not be around for long if they continue to operate the way they are. They have a lot of cash, but cash burns quick when you're losing that much money.
SNAP should not be worth the same as TWTR, this is the efficiency play. Clearly either SNAP is overvalued or TWTR is undervalued. Regardless, this relationship presents a great neutral trade opportunity. TWTR has 50% more MAU (monthly active users) and is valued the same as SNAP while TWTR is profitable and SNAP is not. That is not rational. PINS is as unprofitable as SNAP, has a stronger network effect, better prospects for reaching profitability, and the same MAU's as SNAP, however PINS is valued at half that of SNAP. Again, not rational. I am opening my first position on this with the tight stop shown in the picture. I will be adding below $15, above $16 I will be cutting loses and watching for another entry, if it breaks below $15 again I will hit it again or will watch the tape closely to watch for block selling or areas where MM are creating hype to exit their positions. TWTR long and PINS long posts will follow in the coming days as I open those positions as well.
SNAP currently has a market cap of 21B, PINS 110B, and TWTR 23B. SNAP has a net income of just under -11B, PINS the same, and TWTR became wildly profitable in 2018 netting over 1B. This last quarter TWTR dropped 20% due to weak earnings.
Social media platform success is largely due to the network effect of your platform, which means as more users join the better the platform becomes.
FB has an excellent network effect, TWTR does as well since it's an information platform, the more opinions/content creators the better. TWTR has established itself as a unique form of social media, concentrated on information sharing. It has a unique competitive advantage to other platforms given the structure of its platform, made for short and quick text, easy to scroll through, and easy to share with others. For this reason, it is a great place for viral news and media to post, as well as opinionated statements. The risk in the TWTR platform is the difficulty to advertise to users, this is a challenge that TWTR must figure out moving into the future, however looking at the improvements in their bottom line over the last 5 years, they seem to be moving in the right direction.
PINS has a solid network effect, users create a "virtual corkboard" of ideas and interests, their feeds are then made up of pins similar to their own interests. The more data and users PINS has to create pins, share pins, and collect data on the better their service will become and more ideas will be able to be shared. Although they blew through over 11B in the last year, they have just begun investing heavily in their advertising platform, which has proven to be very successful for advertisers so far. Given the type of content that is put on there (sharing cool things and interests) it makes it a prime location to advertise to the users. As they gather more data and improve their targeting abilities, they will likely follow a similar, if not more accelerated track to profitability than TWTR over the last 5 yrs.
SNAP on the other hand has a weak network effect. I cannotsay that it doesn't have some form of network effect, but since all of their key features (stories and feed) are easily replicated by competitors, there is not much of a reason to keep the service. The unique proposition is disappearing photos, which is a novelty at best, it gets old. They are experiencing growth internationally, but their only way of driving profitability is to stop spending on R&D and lower their SGA expenses. If they invested $0 in R&D last year they still would have lost money. Seeing as they rely on gimmicky new features like fancy filters, their R&D spending will not slow in the future, and in order to run a profit at their current expense levels that would mean more than a 2x increase in gross profit. Needless to say, SNAP will not be around for long if they continue to operate the way they are. They have a lot of cash, but cash burns quick when you're losing that much money.
SNAP should not be worth the same as TWTR, this is the efficiency play. Clearly either SNAP is overvalued or TWTR is undervalued. Regardless, this relationship presents a great neutral trade opportunity. TWTR has 50% more MAU (monthly active users) and is valued the same as SNAP while TWTR is profitable and SNAP is not. That is not rational. PINS is as unprofitable as SNAP, has a stronger network effect, better prospects for reaching profitability, and the same MAU's as SNAP, however PINS is valued at half that of SNAP. Again, not rational. I am opening my first position on this with the tight stop shown in the picture. I will be adding below $15, above $16 I will be cutting loses and watching for another entry, if it breaks below $15 again I will hit it again or will watch the tape closely to watch for block selling or areas where MM are creating hype to exit their positions. TWTR long and PINS long posts will follow in the coming days as I open those positions as well.
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