Why We're Not Crazy About Snap's Spectacles

The recently public social media company Snap (NYSE: SNAP)has been insistent on rebranding itself as a hardware company with the release of its Spectacles glasses.

In this clip fromIndustry Focus: Tech,Motley Fool analyst Dylan Lewis and tech specialist Evan Niu explain what the Spectacles are and what Snap is hoping to do with them, and why they'renot sold on the product just yet. Also, the two discuss why it's such an odd move for Snap to focus its attention and money on hardware and rebrand itself as a hardware company.

A full transcript follows the video.

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Dylan Lewis: You know, that might be the perfect transition into the next section that we're going to be talking about. There had been some news coming out about their hardware business. In the last episode, we talked about how Snap is saying, "We are a camera company," yet they currently make a very tiny amount of money from their Spectacle camera glasses. I think around 96%-98% of Snap'srevenue currently comes in through ads. We have two pieces of news when it comes to hardware. Originally, they only sold these Spectacles at specific locations via vending machines. So, there were these tech insider moments where they would find out there was a vending machine somewhere in San Francisco, and it would be flooded with people in line down the block forever. It was very novelty, it was very buzz-oriented. They've announced that you can now buy the Spectacles online at spectacles.com for just $130, which seems pretty expensive for, basically, glasses that capture what your smartphone does.

Evan Niu:And probably not as well, either. I know that the Spectacles use anAmbarellaimage processor. I'm not sure who actually produces the actual image sensor or the tech specs. I don't think Snap has released the tech specs very broadly. I think they've been playing close to the chest. But, it's weird because you have company that's trying to brand itself as a camera company and they've only been making a camera for a couple months, whereas through the vast majority of their history they have relied on the smartphone camera that's already in your phone, which, in a way, is easier, because the entire smartphone industry has placed a lot of value on really innovating and developing the camera systems because it's such an important thing to consumers. So, you have this intact industry that's pouring money into building the best possible cameras, and then you have Snap come along saying, "Oh, we're going to be a camera company." It's almost committing them to trying to out-innovate the smartphone industry, which, of course, includesApple, which is the richest company on Earth. We were talking about this earlier. Apple's camera department alone has somewhere between 800 and 1,000 engineers working just on cameras, which is why the cameras are so good. Snapchat now has a total of 1,800-1,900 employees. Apple's camera department alone is half the size of Snapchat's entire company. So, who do you think is going to win? [laughs]

Lewis:Yeah, where is the innovation going to come from.

Niu:Yeah. And sure, Snap has this little form factor thing you put in the glasses, but I just think there was certainly a lot of buzz around it, but whether or not that's going to be a long-term deal...it's just really hard to make the pitch. I also don't understand because, in terms of investor perception specifically, I think most people consider Snap asoftware-as-a-servicecompany. Software-as-a-servicecompanies get much richer valuations in terms of all of the valuation metrics because they're more profitable, they can scale better, etc., whereas consumer hardware businesses get very low valuations because everything gets commoditized, you have really thin margins, consumer preferences change a lot so you're always at the mercy of these products cycles, and,not many companies can navigate that well, so investors don't give them very good valuations. So, you have Snap, that historically is a software-as-a-service companytrading at ridiculous valuations now trying to say they're a hardware company, but it's like, why would you want that association if, by proxy, you might be asking for a lower valuation? [laughs] It's weird, I don't understand it at all.

Lewis:Yeah, if you want to look at the market's opinion of consumer device companies, check outGoProandFitbit. These are two companies that sell what I would consider to be very successful mainstream consumer device products, but they've hit saturation points with how much they can penetrate a market, and have struggled to get outside of those markets, and that's one of the problems that a lot of consumer hardware companies run into.

Niu:Even if you look at all these old, mature Asian companies, likeSony-- Sony trades at less than one times sales.Toshiba, all of these household names in consumer electronics, they trade really cheap.

Dylan Lewis owns shares of AMBA and AAPL. Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends AMBA, AAPL, FIT, and GPRO. The Motley Fool has the following options: long January 2018 $90 calls on AAPL, short January 2018 $95 calls on AAPL, short January 2019 $12 calls on GPRO, and long January 2019 $12 puts on GPRO. The Motley Fool has a disclosure policy.