Since its March IPO, Snap Inc (NYSE:SNAP) has lost more than a quarter of its value. But the bumpy ride in SNAP stock is just getting started — an unfortunate likelihood for longs, sure, but it means so much more than that.
Snap managed to lose $2.2 billion on revenue of $149.65 million for the March quarter, a burn rate that could see the company blow through its IPO cash during the Trump Administration.
As of March 31, Snap Inc. had cash and short-term investments of $3.46 billion, enough to make it to August at the first-quarter burn rate. Analysts are expecting revenue of $192.3 million for the June quarter, to be announced Aug. 9, with a loss of “just” $170 million, or 27 cents per share. Failure to hit that growth forecast, or cut losses substantially, could break the stock before year’s end.
I joked about this last month, but the situation is serious. Snap, which opened on June 15 with a market cap of more than $20 billion, is just one unicorn among many in a venture capital corral whose owners have invested at ridiculous valuations expecting a profit.
They won’t get one.
The Coming Unicorn Crash
Most analysts have recently focused on Snap, which is being heavily shorted as its “lock up” period expires, allowing insiders to finally sell their shares. The company recently bought Placed in an attempt to link offline actions to online ads and spur the business further.
But this is about more than Snap. A lot more.
The Nasdaq market explosion, which may have peaked on June 9 when it topped 6,340, was driven by the assumption that winners like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) could go nowhere but up.
Now investors know different.
Just as there is a maximum value for success, there is also a maximum value for relative failure. There are currently about 200 “unicorns” waiting to go public; that’s 200 venture-backed companies each worth over $1 billion.
The biggest U.S. unicorns are truly massive. Uber is said to be worth $62.5 billion. Airbnb, about $30 billion. Palantir, slightly more than $20 billion. WeWork has a valuation approaching $17 billion. TechCrunch estimated in April that the total value of “unicorn” stocks still in private hands is nearly $772 billion.
Still, until these valuations are tested in the open market, they are pipe dreams. Investors have put money into these companies based on these valuations. But those are the claimed valuations of management. These are highly illiquid investments, which can only be owned by insiders or groups which, in theory, could afford to lose their stakes.
The valuations, and the founders who claimed them, are now under fierce attack. Witness the recent upheaval at Uber, the most valuable of the unicorns.
An AOL Moment
This could easily be the current market’s “AOL Moment” — the point where valuations come crashing down as investors rush for the exits. Uber appeared to be preparing itself for an IPO, or a sale of the company, but that now looks off the table amid their C-suite chaos. But clearly, there’s a valuation issue here.
Should we see some other unicorn pull off a “down round” — a valuation short of the level where other investors have bought in — it could easily set off a panic.
Critics have focused on Uber’s “bro culture,” a haven for misogynistic, me-first attitudes epitomized best by Peter Thiel, President Trump’s chief supporter in Silicon Valley.
But this is not about Thiel, or Trump. It’s about a Silicon Valley culture that is out of control, dramatically overvaluing companies like Snap, creating a bubble that is about to crash on the public markets and burn other valuations to the ground.
About one-third of my retirement account is now in cash. I fear it will not be enough.
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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.