Snap’s IPO is a shit investment: here’s why
Self-professed “camera company” (LOL) Snap Inc. is finally going public with the company filing its long-awaited IPO paperwork with the SEC Thursday.
The float is seeking to raise $3 billion on a $20–25 billion valuation in what is the biggest public tech listing since 2014, an impressive feat given that tech floats have been thin on the ground over the last two years baring a slight uptick towards the end of 2016.
It sounds great, but there’s one small problem: Snap is a shit investment.
Why you may well ask given by its own account Snapchat is used by 41% of all American’s aged 18–34 and has 150 odd million users?
The best advice with any investment opportunity is to look at the numbers before handing over your hard earned cash, or as the case may be with investment firms handing over other people’s hard earned cash, and even less than a cursory glance at Snap’s existing numbers and projections in its IPO filing should be enough to cause any sane investor to run in the opposite direction at a million miles an hour.
Of course, we know sanity and tech investments don’t often go hand in hand, but even still Snap is a whole league of extra crazy.
Financials
Snap increased its revenue to $404.5 million in 2016 up from $58.7 million the year before, which to be fair is a seriously good rate of growth, but it should be noted that’s primarily due to the company fully embracing advertising, something it only started to do about half way through 2015 so the opportunity to grow that number was always there and the 2015 figure isn’t representative of a full year of advertising sales.
The money Snap lost increased to $514.6 million in 2016 up from $372.9 million the year before.
Ultimately the aim of the game here is for Snap to earn more money than it spends, in this case, it needed to earn an additional $514.6 million in 2016 to bring in revenue of $919.1 million to break even.
Both revenue and expenses are likely to increase in 2017 and in the years ahead but the question is whether Snap can get to the point where revenue increases at a higher rate than its expenses to be profitable.
Seems simple enough, right? Companies such as Facebook have, given time, turned from loss-making enterprises into highly profitable ones through growing their user base, increasing the inventory available for advertisers and hence the amount of money they bring through the door.
There’s one very big problem, though: while most companies offer glowing reports of future growth, Snap by its own admission states that its user numbers have stagnated and may decline and that it may never for its entire existence be profitable.
You don’t have to believe me, it’s all in their S1 filing:
- “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability,”
- “Our Daily Active Users may not continue to grow…due to users engaging with competing products along with competitors mimicking its products and harming their engagement and growth”
So investors are being asked to pony up a whopping $3 billion to invest in a company that by its own admission will continue to burn money like a drunken sailor downs beer while at the same time losing users to other platforms?
Who are they kidding?
I did mention that sanity does not always prevail when it comes to tech floats with investors desperately seeking to find the next Apple, Google or Facebook, and let’s be fair social is hot right now and there’s no question that Snapchat is a popular app, particularly among kiddies.
But there is precedent here as to how a high-profile tech startup in the social media space with poor underlying financials goes over the long-term, and that’s Twitter Inc.
The parallels are all there be it Snap is burning more money (figures via Recode):
- Snap lost $514 million in 2016. Twitter lost $79 million the year before its IPO
- Snap had revenue of $404 million in 2016. Twitter had revenue of $317 million the year before its IPO
- Snap has 158 million daily active users. Twitter, which only reports monthly active users, had 218 million.
- Snap has 1,859 employees. Twitter had 2,000
Twitter floated in November 2013 at a list price of $26/ share before closing its first day of trading at just under $45/ share, a solid 70 percent first day bounce. Fast forward to February 2017 and Twitter shares closed $17.78/ share February 2nd, higher than its 52 week low of $13.73 but still a solid $8 per share down from its float price.
There are more parallels: Twitter constantly reports making a loss, its own user base while up from the time it floated has stagnated, and while steadily increasing its advertising revenue it has never been able to hit that magic point where its income was higher than its expenses.
Twitter had a growing user base when it floated, Snap doesn’t. Twitter had its costs fairly under control, Snap doesn’t. Twitter appeals to people of all age groups, Snap appeals primarily to millennials only.
So if Twitter couldn’t make it work post-IPO, why would Snap be any different?
The Instagram problem
Twitter has always had one advantage in the social space and that’s its lack of direct competitors; for those who can remember Twitter’s early days there were quite a few companies around in the micro-blogging space but all have gone by the wayside with Twitter being the only major company in its space.
Snapchat doesn’t share that advantage.
While it could be argued that Snapchat doesn’t compete directly with Facebook despite the fact it kind of does, it most certainly does with the Facebook-owned Instagram.
The reference in the IPO filing referring to competitors mimicking their product points directly to Instagram, who introduced a feature by the name of “Stories” back in August last year that has been described as being a near identical copy of Snapchat’s own “stories” feature, not only in name.
Instagram’s decision to play by Snapchat’s own playbook turned out to be a resounding success. From TechCrunch January 30:
Most reported declines in Snapchat Stories view counts ranging from 15 to 40 percent, and a reduction in how often they or those they monitor post to Snapchat Stories. Meanwhile, our sources report rapidly growing view counts on Instagram Stories, and engagement-to-follower rates one social influencer talent agent called “Insanely f*cking high”.
I’d normally avoid using personal anecdotes but I was visiting a friend in January who told me that her daughter no longer uses Snapchat because it’s considered no longer cool and that she was doing all of her social networking now via Instagram. I was also surprised to learn that along with the Stories feature Instagram even supports direct messaging meaning that an app I knew as nothing more as a photo sharing service is now taking the role of a full blown social network as well for an increasing number of people.
The public figures back that anecdote up, and with Instagram thriving and Snapchat numbers stagnant or declining what we could be seeing here is a replay of MySpace vs. Facebook, where the ruling MySpace which was where all the cool kids once hung out fell off a cliff in terms of user numbers in the space of a few years as Facebook overtook it to become the dominant social networking site.
Perhaps it may be too early to make that call today, but the parallels are there, and if you were looking to invest in Snap you’d have to seriously consider the possibility.
There’s nothing positive looking forward with Snap’s business model and projections, and crappy looking camera glasses (really, what were they thinking?) are nothing more than a distraction from a core business that won’t provide growth opportunities for Snap going forward.
Some equate investing to gambling, and while there are schools of thought on both sides an investment in Snap is like placing a high-stakes bet at a Texas Holdem Poker table when you’re holding a 3 and 7 in different suits before the flop: you could possibly win by playing that hand but the odds from the outset are remarkably low.
