Snap Inc (NASDAQ:SNAP) missed its window for going public.
Snapchat opened for trading Aug. 15 at $13.05 per share, half what it opened at in March at its highs, and at that price almost half the analysts following it say it is, at best, a hold. Revenues for the June quarter were more than twice those of the year before, but losses were twice revenues — a loss of $443.09 million, 36 cents per share, on revenue of $181.67 million.
Growth prospects, in the face of Facebook Inc (NASDAQ:FB) copying key features and grabbing advertisers through its ad network, do not look good. David Tepper’s Appaloosa Management dumped its stake in the company even while it was loading up on other tech issues like Apple Inc. (NASDAQ:AAPL) and Alibaba Group Holding Ltd (NYSE:BABA).
But there is a bigger lesson here.
The Unicorn Overhang for SNAP Stock
Before going public, Snap went through six major funding rounds. Its December 2014 round showed a valuation of $10 billion. That’s not far from today’s value. People who put $1.8 billion on the Series F round, in May 2016, may well be showing losses. Its stated valuation at the time of the IPO was $22.2 billion.
The lesson is that stated valuations are like paper profits. They are not real until you cash out and have the money in your hand. Smart people have lost money in Snapchat.
TechCrunch says there are now 263 unicorn companies, privately held with valuations listed at $1 billion or more, worth $900 billion. The valuations listed for them are guesses, or estimates made by the companies in their last funding round. It’s not real money.
Once the public stock markets roll over, as they have tried to do several times in the last few months, these valuations will be seen for what they are. The Nasdaq market has a total valuation of $7.449 trillion, and another $900 billion thrown on that fire is just going to go up in smoke.
Even a minor pullback, like the 10% retracing the Nasdaq experienced in early 2016, could create panic in the unicorn stable. And the average is now 23% higher than in 2000, right before the dot-com market collapse.
Snap Leaking Cash
The rush to the exits has already begun at Snap.
Despite bouncing higher as employee lock-ups expired, Tepper is not the only genius getting out. Dan Loeb’s Third Point LLC dumped it. So, too, did Barry Rosenstein’s hedge fund, JANA Partners, and Singapore’s Temasek Holdings.
Snap has never been profitable, but now it’s running through its cash. It burned through $1.1 billion in cash over the 12 months ending in June, and while it still had $2.8 billion after the IPO, that’s maybe two years of runway.
That is why its recent run-up looks like a bear trap, a technical move meant to squeeze short sellers. As Vince Martin wrote recently, everything is going wrong.
The Bottom Line
SNAP is a company whose CEO is 27, and whose CTO is 29. That’s the age of my kids. Yes, Mark Zuckerberg and Bill Gates. But Evan Spiegel is no more Mark Zuckerberg than Lonzo Ball is LeBron James or, to use a soccer analogy, than U.S. starlet Christian Pulisic is Cristiano Ronaldo. (Add your own analogy here.) Quality must be proven before I will put money on it.
Still, Serge Berger says there is hope. Facebook took 14 months to find its footing in the public market, and maybe Spiegel will also prove himself. He suggests waiting past all the lock-up periods and perhaps a little further, to see if SNAP stock can fly.
It’s hope that at least it won’t cost you money.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB and BABA.
