If you are a public investor, Snap Inc (NASDAQ:SNAP) has been a loser. The company got a pop off its initial public offering price of $17 per share in March, the first trade going off at $24.22, but the premium is now nearly all gone.
SNAP opened for trade July 10 at $17.12. Facebook Inc (NASDAQ:FB) has seen Snap services as threats to its social network for some time, offering its own versions of disappearing messages and stories.
This has caused InvestorPlace writers to warn against buying Snap practically since its IPO. Tom Taulli wrote on June 13 Snap was “disappearing along with its users.” James Brumley wrote on June 27 you were “buying an identity crisis” if you got into it.
Ben Kenwell could find “no good reason” to buy it on June 29. Josh Enomoto said “abandon ship” on July 7. But what does this say about the larger market, and your investment strategy?
Fall of the Unicorns
Snap was a classic “unicorn.” That’s a technology company private investors bid to a valuation of over $1 billion. Each venture funding was made at a higher valuation, a valuation that was not tested in the market. In the case of Snap, the later rounds were overly-generous.
CB Insights lists 203 such unicorns, with a total valuation of $707 billion. Note, again, these values have not been tested by the market. A profit is not a profit until you sell, until you have more cash in your hand than you started with. There may be much less value here than meets the eye.
While the 1990s dot-com boom hit public investors, who rode stocks to the heights and then watched those values disappear, the 2010s unicorn boom has been driven by venture capitalists, and their private equity friends. But that doesn’t mean that public investors can’t get burned by the fallout.
The New York Stock Exchange, for instance, has been considering a “Spotify rule” (named for a unicorn that remains private) which would let investors take a company public without the company itself raising cash. There’s a word for an investor who buys this kind of thing. It’s not a nice word.
Excess Heat Will Dissipate
When rich people feel the heat, poor people will, too.
All markets go through psychological cycles of fear and greed. The rise of the unicorns was pure greed. The Spotify rule is an illustration of fear.
There is also a more general rule in technology, the 90-9-1 rule. The industry’s winners get 90% of the profit, a second competitor may get 9%, but the rest share the 1%. In other words, technology competition flows naturally, and quickly, toward monopoly.
This has always been the case. It was true for International Business Machines Inc. (NYSE:IBM) in the 1950s, it became true for Microsoft Corp. (NASDAQ:MSFT) in the 1990s, and for Alphabet Inc. (NASDAQ:GOOGL) during the current decade. A monopolist can fall when their product becomes obsolete, as with the IBM mainframe or today’s PC, but the rule remains – win or go home.
Snap Can’t Win
Snap thinks a content development deal with Time Warner Inc. (NYSE:TWX), now being bought by AT&T Inc. (NYSE:T), can resurrect its fortunes. It can’t.
There will be one winner in social networking, that winner has been established, and until the idea of social networking is challenged, by some other technology, that is not going to change.
Meanwhile, Snap’s failure to launch is a warning to all technology investors. If you’re not the winner now, you’re nowhere. And the winners won’t keep winning much longer as the losers’ losses drag them down.
The tech market is headed for a nasty fall.
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 MSFT and FB stock.
