There was a time when Snap Inc’s (NYSE:SNAP) disappearing message service was hailed by Wall Street as the next big thing in social media. Worries about Facebook Inc’s (NASDAQ:FB) ability to continue building its empire as SNAP chipped away at its clout among young people provided the perfect backdrop for Snapchat’s IPO, and many were chomping at the bit to get a piece of the little white ghost.
Fast-forward five months and you have a very different story. The stock has lost nearly 50% since its debut — including over 20% in just the past month during the leadup to the firm’s lockup expiration.
Now, some analysts are saying it could be time to buy SNAP stock. After all, Facebook, Twitter Inc (NYSE:TWTR) and LinkedIn suffered from similar dips after their own lockups expired and all three saw their share price increase again a few months later.
First of all, TWTR isn’t the best example of a social media stock you want to have hanging around in your portfolio. Secondly, this week was only the beginning of the lockup expirations. But more importantly, Snap has a lot of other massive problems outside of just the lockup expiration that make it a poor investment option.
Lockup Schedule
July 29 was the beginning of SNAP’s lockup expiration, and 400 million shares from early investors were able to go up for sale. Aug. 14 is the next big date, at which time employees, directors, founders and insiders with a total of 782 million shares will be able to sell. Finally, on Aug. 29 an additional 20 million early investor shares will be unlocked.
Many analysts see early investors selling at least some of their shares. S3 has estimated somewhere between 10% and 30% of those shares making it to the market. However, the employee, director and insiders piece of the pie is a little bit more complicated.
Usually, you wouldn’t expect to see many of those people get rid of their company shares, but in the case of SNAP we might see at least a small departure from that norm.
I say that because the company culture at Snapchat is unusual and the firm hasn’t exactly been known for its employee retention as of late. Three of the firm’s top-level leaders recently departed — VP of Human Resources Robyn Thomas and VP of Security Martin Lev, as well as General Counsel Chris Handman, all left the company over the past two months.
Not only have two high-level execs jumped ship, but reports about SNAP’s company culture suggest that lower-level employees may not have much faith in the firm’s future simply because they have no idea what it is.
SNAP CEO Evan Spiegel apparently keeps his cards close to his chest and Snapchat employees are asked to work hard toward a future they are blinded to. Spiegel and a small circle of high-level execs are privy to Snapchat’s future roadmap, but the rest of the firm is simply trusting that Spiegel knows what he’s doing. Not only does that make me question how many of them will sell their SNAP shares, but it makes me question how the company can be successful without more transparency.
A Confusing Picture
Perhaps I find the company culture so perplexing because I had a glimpse of what Snapchat employees must be feeling when I tried to work out what the company’s growth plans are. SNAP has labeled itself as a “camera company,” a confusing nod to the firm’s video-capturing sunglasses. That’s worrying because the real potential, at least the potential everyone has been talking about, for Snapchat is advertising, not hardware.
And speaking of advertising, Snapchat doesn’t really have a clear path there either. Sure, SNAP has captured the attention of millennials and yes, that’s extremely important to advertisers, but that doesn’t mean users are going to respond favorably to marketing on the service. Comscore, Inc. (OTCMKDS:SCOR) has said that video ads should last somewhere between 5 and 6 seconds in order to appeal to millennials. So that begs the question, should advertisers even bother?
Of course, there are some brands that can easily gain traction with a 5- or 6-second ad, but is that doable for everyone? The return on investment for a 5- or 6-second ad may not be much, so advertisers may not be willing to pay SNAP much for space.
The Bottom Line
We might see SNAP stock pick up in the months following the lockup expiration, but I wouldn’t count on a meaningful rise. Snapchat is a cool service, but SNAP stock is a dud. The company’s bizarre corporate culture and muddled future plans make it far too risky to keep around.
As of this writing, Laura Hoy was long FB stock.
