Today was the IPO for Snap, Inc., the company that makes Snapchat. As one of those people who doesn’t “get” Snapchat I won’t be analyzing the product or what makes it special. Instead, I’m going to take a quick look at the reality of the financials and let you figure those other parts out for yourself.
All IPOs are fairly ridiculous when it comes to pricing, subscribing, and issuing shares. They get doubly so when the company going public is famous enough to attract the type of people who don’t usually buy IPO shares, and in fact, those that actually have no idea how it is done.
In these cases, one often sees a huge “pop” in the stock price. Keep in mind that as an individual investor without an established relationship with one of the companies underwriting the IPO you cannot get the IPO price at all. Instead, you could theoretically get the “open” price.
So, here is how it works. Established customers got the opportunity to buy into SNAP for the IPO price of $17 per share. Regular investors got their first chance to buy at the open price of $23.71. The stock is now (around 1:19 pm ET) trading for $25.38. So, for all those headlines screaming about a near 50% increase in the stock price, that only happened for insiders. Every one else is up about $2.
Is Snap a Good Long-Term Investment?
This is where it gets tricky. For recent comparisons, you can look at Facebook — which did very well — and Twitter –which did not.
The main thing to focus on is that Snap loses money, a lot of money. The company lost $515 million on $404.5 million in revenue in 2016. Put another way, Snapchat has to figure out how to increase revenue by over half-a-billion dollars (without increasing expenses) just to break even. You have to really believe in a company to buy into that.
There are two things that make me very nervous about Snapchat’s new stock. First, it’s revenue is nearly 100% advertising based. There are exactly TWO tech companies of this magnitude making this work right now, one is Google, and the other is Facebook. Everyone else is flailing about as this advertising-only revenue strategy falls apart. Even Twitter can’t get profitable using this method.
The answer is supposedly user growth, but the catch is that when “everyone” is already using your product, how can you get any new users? And if you have to keep spending money to attract new users, and support that greater number of users, then you still end up losing money.
The upside to this is supposedly that Snapchat is all about the millennials and those under 30. That’s great, but even millennials grow up, and while they may continue to be big Snapchat users, there is little indication that anyone else is coming on board. If you’re thinking that there will always be new users out there, you are correct, but the next wave of young users always seem to end up using their own thing. That’s why there is always some hot boy band out there, but never the same hot boy band as 10 years ago. How many years does Snapchat have left?
Remember that Facebook was under pressure from the up and coming Instagram, and had to buy them out when Instagram became the hot, new thing that young users were flocking to. Why believe that Snapchat will be any different?
The second thing that freaks me out is the share structure. All these shares you are buying have no voting rights. The reality is that shareholders have little to no ownership of companies anymore these days, but to codify it makes you wonder what exactly are you buying? You have no ownership rights, and no dividend. This is basically a well regulated collectible whose value rises and falls with company’s popularity on Wall Street.
In the end, Snapchat is the prototypical tech IPO there is huge POTENTIAL upside, but just as much (more?) risk that goes with it. If everything does according to plan and user growth increases, and advertisers keep coming and spending more money, then, this is the next big thing. But, if one of those things fails to happen, this is the next company scrambling to find something to replace advertising as its revenue stream, and nobody has figured that out yet.
At the time of publication, the author did not own shares in any of the stocks mentioned in this article.
This is not a recommendation to buy or sell stocks. The author is not a financial advisor, and does not hold himself out to be one.