The launch of Snap's (NYSE:SNAP) Spectacles product made it clear that the company is working to position itself a "camera company." In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss how Spectacles may be more trouble than they're worth.
A full transcript follows the video.
This video was recorded on May 12, 2017.
Dylan Lewis: Why don't we start with Spectacles? I know leading up to their IPO, one of the biggest things I was wondering was, what is this doing for their business? This is hardware, we think of them as a software and platform play. Are they getting anything meaningful there? What your take on what's going on?
Evan Niu: It's weird because Spectacles seems to be the basis for why they rebranded themselves a camera company, because now they make a camera product. But, we've talked about this before, it's a strange identity to try to carve out for yourself. But, they have started disclosing a little bit more detail about Spectacles. They said last quarter, Spectacles revenue was about $8 million. At the same time, they've also broken down their costs in more detail, which is very useful for investors. We talked about the hosting costs, which they broke out. But, if you look at this other category, other cost to revenue was about $20 million, and I'm pretty sure that is predominantly related to Spectacles, if you look at the language in their filing. If you think about it, that's operational, the only other real part it could be. The revenue, $8 million, and the cost was $20 million, so obviously they're losing about $12 million in the quarter on Spectacles on the hardware side. And that includes building these machines and having inventory costs, and all the physical logistics associated with physically selling a product, which, this is the first time they've ever done that. So, they're probably losing a bunch of money upfront. Hardware is, of course, naturally very hard to do as a sustainable business in long term, where you can have product cycles and get people to constantly buy your product. But, in terms of engagement, I think it's very interesting because it doesn't seem like Spectacles do a whole lot in terms of engagement, either.
On the call, Spiegel said there have been 5 million Snaps created via Spectacles to date. Spectacles launched in November. At the same time, they said in the first quarter there were three billion Snaps per day created. So, throughout the whole quarter, we're talking about 270 billion Snaps that are created on the platform. Less than 5 million of that comes from Spectacles. If you do the math, that's 0.002% of Snaps created -- less than that because that's just in the quarter. So, it just begs the question, why are you doing this? No one is using these things in a meaningful way. It's literally a rounding error at this point, 0.002%. Who cares about that?
Lewis: Yeah, that's basically a footnote, right?
Niu: Yeah. You're losing money, you're putting all this effort into it, you're probably hiring a bunch of people to work on these things and whatever comes next in the product pipeline on hardware. And they're not doing anything in terms of engagement, users aren't really using them, and now you're jumping into this space of trying to develop camera hardware, which, the other 99.998% of usage is coming from smartphone cameras. Smartphone cameras are amazing these days. There's no way that Snap is going to come out with a better camera than Apple or Samsung. So, why? It makes no sense to me. They're losing money, they're not helping engagement, and there's no way they can actually compete.
Lewis: Yeah, when I first saw them doing this, I thought they were really smart in creating a lot of buzz every time that they launched a new location, they would drop these vending machines that had a limited number of Spectacles in the middle of these remote spots, or in city areas. They wound up getting a ton of press for it. I thought it was a really brilliant marketing play, and it built a lot of awareness for the company. But there's a big difference between building buzz and being a viable product segment. I don't think that investors should expect a whole lot to be coming from the Spectacles or the hardware segment any time soon, if ever, just because, like you ran through the economics right there, and they're really not that great for the business.
Niu: Yeah. I definitely agree that the launch was a very successful marketing campaign, because everyone was buzzing about it. There was a lot of hype around these things. So, I definitely agree that the event was successful as a marketing event. But, now that we're starting to get some numbers out of the company, in terms of usage and financials, it just doesn't seem worth it to me.
Dylan Lewis owns shares of AAPL. Evan Niu, CFA owns shares of AAPL. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has a disclosure policy.