Snap: 3 Things You Should Have Noticed Before the IPO

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SNAP stock - Snap: 3 Things You Should Have Noticed Before the IPO

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Snap Inc (NYSE:SNAP) was down nearly 15% from its first trade on an exchange in early March and off by more than 30% from its high hit the very next day. So it’s not a stretch to say Snapchat’s parent company  has been something of a disappointment to a lot of investors who were sure SNAP stock was going to fly.

Snap: 3 Things You Should Have Noticed Before the IPO

Source: Shutterstock

After all, the messaging platform was adding users at an amazingly brisk pace, and the revenue spigots had just been opened wide.

Funny thing about the rhetoric before and after the IPO: Before the company went public, it was being touted as the next Facebook Inc (NASDAQ:FB). After the IPO when its founders and the stock’s underwriters got paid, it’s being compared to long-term disappointment Twitter Inc (NYSE:TWTR).

It’s time to talk truth. A lot of unsuspecting investors got duped into buying SNAP stock for all the wrong reasons.

Red Flags in Black Ink

You’d think after Groupon Inc (NASDAQ:GRPN), Twitter, Zynga Inc (NASDAQ:ZNGA), Twilio Inc (NYSE:TWLO) and dozens of other post-IPO disasters, the market would figure out the game. That is, most companies about to go public put themselves in the best possible light in order to create the maximum demand for their stock. After they’re trading on an exchange and become fully-reporting entities, the proverbial dirty laundry starts to surface.

Snap was no exception to this norm. In April, it’s first-ever quarterly report as a publicly traded outfit indicated (yet another) slowdown in user growth, and a sequential decline in revenue. As it turns out, text messaging platforms are something of a commodity, and there’s a limit to how long users are interested in pics and movies sent from other users.

That’s something perhaps not adequately discussed in the company’s IPO prospectus posted for interested buyers of SNAP stock.

In the meantime, CEO Evan Spiegel has exposed his inexperience as the chief of a publicly traded company.

Case in point: He recently said he wasn’t interested in expanding in India because, as a poor country, it wouldn’t be worth the effort. Not only does the mindset not acknowledge that the platform and its operating costs scale up and down with revenue — the platform’s sunk development costs won’t change much — it’s proof once again that sometimes the best thing to say is nothing at all.

And yet, to those investors who actually bothered to read the company’s prospectus before going public (and taking it all in without any preconceived bias), none of this should be surprising.

For example, user growth was slowing even before the first quarter … and not just in percentage terms, but in absolute terms. Last quarter’s headcount of 166 million daily users is simply an extension of the already-waning growth trend.

Spiegel’s youth was right there in plain sight too. At only 26 years of age and no real work experience other than developing a curious but not particularly unique app, it can’t be terribly surprising he’s having a tough time embracing the fact that he’s always in the public eye, and will always be scrutinized by Wall Street.

Then there’s this little gem (which you can click to see in full-size), explaining in detail how founders Speigel and Robert Murphy have own classes of common stock with more voting power than the shares of SNAP stock issued with the initial public offering … a lot more.

Snap ownership
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And anyone who thinks Speigel could be easily replaced by shareholders should he not be up for the job better think again.

Indeed, the prospectus plainly said:

“Our two co-founders have control over all stockholder decisions because they control a substantial majority of our voting stock. The Class A common stock issued in this offering will not dilute our co-founders’ voting control because the Class A common stock has no voting rights.”

Yes, Alphabet Inc (NASDAQ:GOOGL) also has more than one class of shares that keeps its top managers firmly in charge of the company. Snap isn’t an Alphabet, though … not even close.

So why, pray tell, would anyone in their right mind want to get involved in something like Snap/Snapchat, knowing full well there’s no realistic way the company could ever justify its valuation?

The answer is simple: Facebook.

The whole story Snap is serving up now looks a lot like the one Facebook served up back in 2012, complete with a 20-something CEO. The only difference was and still is, there was nothing like Facebook at the time, and Mark Zuckerberg did everything right. Snapchat just isn’t a compelling business. It’s a clever idea, but as was the case with Twitter and Groupon and a handful of others, not all interesting ideas are good business.

And that’s an important enough lesson to repeat: Not all interesting ideas make for good businesses.

Bottom Line for SNAP Stock

To answer the bigger, philosophical question of why Snap was all the rage two months ago and still has a pretty strong following despite a lackluster performance, Fortune’s Adam Lashinsky may have summed it up best back in February, even before Snap went public. He explained:

“The “camera company” (per its S-1) Snap Inc. publicly disclosed its going-public intentions Thursday. What fun it will be to watch you go, Snap Inc. Your user growth rate is slowing, your presumed price-to-sales ratio is enormous, and your governance is, well, horrible. Founders Evan Spiegel and Bobby Murphy have no intention of giving up control of their brainchild. Ever.

This is exciting, though, because Snap in a weird way is going all old-school on unsuspecting retail investors. Back when IPOs were plentiful it was hip for issuers — that is, companies issuing stock — to lose money. That way folks at home, clicking on their online brokerage accounts, could pretend to be venture capitalists. Snap is losing gobs of money. It’s full of promise. It’s wonderful.”

Yes, it’s wonderful … right up until the point when investors realize hype doesn’t pay the bills. Those wannebe venture capitalists who may have missed some or even all of the Facebook post-IPO gain, however, were so hopeful that they dare not read a prospectus that might prevent them from pulling the trigger.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/snap-inc-stock-3-things-before-ipo/.

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