Snap Inc (NYSE:SNAP) is a throwback to the 1990s, when venture capitalists would back a company until it seemed viable, then throw it on the public market so small investors could get burned.
Snap, which was founded in 2011, offered messages that would disappear after 20 seconds, like the self-destructing tapes on Mission Impossible a half-century ago. That’s a feature, not a company.
In the run-up to its IPO, a program to create cartoons without artistic skills called Bitmoji and a set of “smart” glasses called Spectacles were acquired, but the heart of the company was always the self-erasing messages.
Still, in the year before its IPO in March, Snap drew advertising. It showed a solid quarterly growth rate, revenue of $38.8 million in the first quarter of 2016, and $149.65 million in the first quarter of 2017. Draw a line through that and you get success.
But, as they say on Wall Street, a fool and his money were lucky to get together in the first place.
Post-IPO Disaster
The stock flew off the shelves in March and traded as high as $29 per share, but since then the company has seen nothing but disaster, starting with those earnings.
SNAP burned through more than $2 billion in research and general expenses during that first quarter, looking for something that might grow revenue to justify the company’s valuation. Operations lost $155 million of cash, which represented progress against the $611 million in operations cash drain of the December quarter, but was still a burn.
As our James Brumley wrote, the warnings of disaster were there even before the IPO. The numbers indicated the technology was a fad, none of the executives were ready for prime time, and management had already entrenched itself with “Class C” shares that gave them complete control of the company.
Yet, there remained Snapchat bulls. These are the same people who doubted Facebook Inc (NASDAQ:FB), after all. They doubted Twitter Inc (NYSE:TWTR). Okay, bad example. They doubted Facebook.
They also doubted Pets.com.
Yes, the company was sitting on $3.24 billion in cash at the end of March, and with the IPO proceeds it might not burn through everything in five years. It may be a top Internet idea, but it’s still mainly an idea.
The hope is that, just maybe, SNAP will grow up one day. Do you want to invest in hope?
What’s New?
There are new things coming from Snap.
TV networks desperate for relevance are throwing C-list celebrities at it. It’s getting its own news show. The custom stories feature is getting good reviews. Bitmoji is being integrated more tightly into the app.
SNAP also has big name advertisers such as PepsiCo, Inc. (NYSE:PEP) who are trying new things on the site. Snapchat lenses are transforming augmented reality into a market.
It seems unfair that a giant company like Facebook might be able to copy its smaller rival’s best features — through Instagram — and crush that competitor in its crib. But, this is just corporate evolution in action.
A new technology niche always leads quickly toward monopoly, like Intel Corporation (NASDAQ:INTC) microprocessors or Microsoft Corporation (NASDAQ:MSFT) PC software. As long as the first mover doesn’t throw the game, as Yahoo did by taking its eyes off search and becoming merely a “portal,” this advantage is going to abide. Facebook, because it scaled quickly and committed to its own cloud, proved it was not stupid.
Two Thousand Zero Zero Party Over, Out of Time
The investment lesson seems clear, at least to me.
SNAP tells us what time it is, or rather what year it is. It’s 1999. Tech is flying because it’s the only thing working. We’re all looking for the top because we don’t want to miss any of the gains.
When the top is found, watch out below. I can’t tell you when that will be, what the catalyst will be, but such an event will happen, it will be obvious in retrospect, and if you’re still dancing when the music stops you will walk out of the casino broke.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, 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, MSFT, and INTC.
