Snap Inc (SNAP) Just Keeps Putting Itself at Risk

Snap Inc (NYSE:SNAP) is getting desperate. The camera and social media company, which once had a market capitalization of $28 billion, is more aggressively turning to hardware to solve its software growth woes.

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According to CNBC, Snap is in talks to buy Chinese drone maker Zero Zero Robotics for somewhere between $150 million and $200 million. Snap would likely leverage the drone maker’s technology to create an integrated Snap-streaming drone.

That would be the company’s second hardware product. Late last year, Snap launched Spectacles, integrated Snap-streaming glasses. Will this hardware push solve Snap’s growth problems?

Nope. Spectacles is a flop; a Snap-integrated drone would be a flop with better footage. Here’s why.

No One Wears Spectacles

Late last year, Snap launched Spectacles. They were supposed to be these super cool, trendy glasses which were connected to your smartphone and could be used to record snaps. It was like a GoPro Inc. (NASDAQ:GPRO) camera without any of the durability, but with all of the social and mobile integration. But despite all the fanfare and hype, the numbers seem to support the thesis that Spectacles have largely been a flop.

Snap doesn’t specifically break out Spectacles revenue, but the company does report “other revenue.” According to management, that “other revenue” is almost entirely Spectacles revenue. In this sense, Spectacles revenue was roughly $4.5 million the fourth quarter of 2016 and $8 million in the first quarter of 2017. That is $12.5 million in Spectacles revenue since the product launched. The average selling price (ASP) on a pair of Spectacles is about $130. Dividing the $12.5 million in total revenue by a $130 ASP, we can see that Spectacles has sold about 100,000 units (as of Q1 end).

With 166 million daily active users on Snapchat, that means less than one out of every thousand daily users owns a pair of Spectacles. That’s a pitifully low penetration rate.

And search interest trends indicate the currently low penetration rate will remain low. Search interest related to Spectacles is only falling and is actually near an all-time low since the product’s launch.

A Snap Drone Will Also Flop

Drones are cool, and the industry is growing rapidly. Research firm Gartner thinks the global drone market grew 60% last year. They also expect the market to grow another 39% this year.

Meanwhile, NPD thinks the U.S. drone market more than doubled in the 12-month period ending in February 2017. But the problem is that the growth is being driven almost entirely by the industry giant, China’s DJI.

DJI is the power-player in the industry. For drones priced between $500 and $1,000, DJI is the market leader with 36% share. It’s also the market leader for drones priced between $1,000 and $2,000 with 66% share. The same is true for drones above $2,000, where DJI is the market leader with 67% market share.

This dominance is only growing and it’s scaring away competitors. This is true even in the price range market ($500 to $1,000) where DJI is least dominant. The firm with the second most market share in that price range, 3D Robotics, threw in the towel last year on competing with DJI. They’ve stopped making drones and instead are focusing exclusively on software development.

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Because of DJI’s dominance, betting on a drone to save the day for troubled SNAP stock is the wrong bet to make. GoPro bulls made a similar bet. They also thought a drone would save the day. There was plenty of hype surrounding the launch of GoPro’s drone, Karma. But GoPro’s operational results haven’t really improved since Karma’s launch. Consequently, GPRO stock is near all-time lows.

Bottom Line on SNAP Stock

Snap is really trying to live up to its name as a “camera” company. But SNAP investors have nothing material to hang their hat on. Spectacles has a been a flop thus far, and the drone market is being dominated by DJI.

Snap, though, is getting ready to bet more than $150 million that drones could save the day.

That’s a bad bet, and a big risk for SNAP stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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