Snap Inc (NYSE:SNAP) reported a huge loss after trading on Nov. 7, one that puts its future in serious doubt.
The social media company run by 27-year old Evan Spiegel said that for the first nine months of 2017 it has lost nearly $3.1 billion while bringing in under $540 million in revenue.
Free cash flow for 2017 so far is a negative $621 million. Year-over-year, daily active users increased just 17%, and average revenue per user was up just 39%, to $1.17, while daily hosting costs rose to 68 cents per user. Some $40 million of its “Spectacles” hardware had to be written off in the September quarter.
The response was immediate. The company lost 15% of its value on Nov. 8 and in overnight trading, opening on Nov. 9 at $12.75 per share.
That’s a far cry from Snap’s initial public offering (IPO) in March, which was priced at $17 per share.
China Not Happy, Ain’t Nobody Happy
Investors looking for a silver lining were left with schadenfreude because it was reported that Tencent Holdings Ltd. (OTCMKTS:TCEHY) had recently taken 12% of this dog for $2 billion. That values the company at over $16 billion, when the public market cap is $14.8 billion.
Speculators buying the stock (I won’t call them investors) are betting that a redesign scheduled for December 4, supposedly making it easier to use with a feed system like that of Facebook Inc (NASDAQ:FB), will deliver a “personalized content system” and dramatically increase the user base, ad revenue and future profitability.
Oh, and right before that happens, chief of engineering Tim Sehn is leaving the company. A filing with the Securities and Exchange Commission shows he resigned the same day earnings were released.
Other Than That, How Was the Play?
The only play Wall Street wants people to make on Snap today is to short the stock.
Pivotal Research predicts a fall of 40%. Broker notes on the earnings were brutal, and Jim Cramer had a field day demolishing the company’s prospects, saying it shouldn’t even be a public company. One writer predicted the company will soon disappear like pictures are supposed to do on the system.
I have been personally dumping on Snap for months, calling it nonsense as an investment and suggesting its failure is a warning to other “unicorns,” private companies whose venture investors believe them to be worth over $1 billion, like Uber, WeWork and AirBnB. In fact, I even predicted a “unicorn crash,” based on Snap’s problems, back in June.
Luke Lango agrees. Snap, he writes, is “doomed, get out now.” Don’t say you weren’t warned.
Bottom Line on SNAP Stock
I have personally become so disillusioned with the over-hyped unicorns like Snap that I sold out of my position in Facebook recently, putting most of the proceeds into cash.
I think the unicorn crash, which will have to happen out of sight because these companies are not publicly traded, is going to spell big trouble for the whole market.
There is no reason for younger investors to panic. I have kept my money in the market through multiple bear markets, even the Great Recession, and the markets do bounce back. It’s just that my age, 62, has increased my need and desire to preserve capital rather than grow it.
Younger investors can wait for the tech sector to come back and can take a failure like this in stride, although the demographics (with 4 million baby boomers retiring each year for the next decade) indicate continuing selling pressure on speculative investments.
You may look back at the Snap “earnings” as the beginning of the end for the second dot-com bubble.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.