Snapchat – the Definitive Answer

Yesterday, I gave you a ton of useful information about the forthcoming Snapchat initial public offering (IPO). But, in conclusion, I admitted that I didn’t actually have a clue about the stock. I’ve been burned too badly in the past, by making mistakes in calling social media stocks.

Today, I promised that you’d be hearing from someone who actually knows what he’s talking about. And we’re not ones to disappoint at Exponential Investor.

I’ll shortly hand you over to the man who does have a clue. Nevertheless, in true Andrew Lockley style, I’ll be constantly interrupting and arguing with him, as he tries to get his point across.

Eoin Treacy may be familiar to you as the author of Frontier Tech Investor. That’s Exponential Investor’s bigger, harder, better-connected brother. Exponential Investor starts fights that Frontier Tech Investor has to step in and finish. And Eoin has some pretty strong opinions about Snap’s IPO.

I’ll hand you over…

Eoin: The Snapchat IPO offers a window on the world we live in today.

Three reasons not to invest in Snapchat – at the IPO price:

  1. Shareholders will get no voting rights 

    The founders of Alphabet (Google’s parent company) introduced its C-Class shares in 2014. These concentrate voting rights in the founders’ hands, thus limiting the roles of investors in decision-making. Facebook, LinkedIn, Groupon, Yelp and Zynga are also following similar strategies. I’m a fan of both Alphabet and Facebook – but they make money, whereas Snapchat doesn’t. While the social media sector remains within its growth phase, investors will probably continue to look past the lack of influence it has on boards. However, it will only take one big bankruptcy to highlight the fact that not everyone at the top of a tech firm is a genius, or a Platonic philosopher-king. Then, companies that offer no rights to investors will be priced accordingly.

  2. Snapchat is paying too much to acquire new users

    … because it has outsourced its client acquisition to Google. It’s already signed away $2 billion in revenue over the next five years. That means it has a more difficult route to profitability than Facebook, and more importantly its product is easily replicable by its competitors.
    Andrew: Eoin’s quite right on this. Tech companies pretty much live and die by the ratio between customer acquisition cost (CAC) and customer lifetime value (CLV). In Snap’s defence, it’s at least possible that the novel ad formats inherent in the Snapchat product may lead to an ability to maintain strong ad revenues, in the long term. Furthermore, engagement is pretty high – with users spending a long time each day with the product. Nevertheless, if the top of the funnel is just too expensive, then it’s impractical to catch up later, with better monetisation.

  3. Snapchat is getting into wearables

    Personally, I think its glasses look ridiculous – but as an investor, I’m concerned they are expensive to manufacture. “Is Snapchat the next GoPro debacle?” is a very relevant consideration for any investor – and that is before they ask whether it is the next Myspace.
    Andrew: We’ve covered wearables in Exponential Investor before. Those in the sector remain bullish, but it’s fair to say that the market leaders in such hardware fripperies are having a tough time – with Fitbit and Jawbone being prominent examples. These two firms are currently knocking lumps out of each other, but neither is doing a great deal to explode the sector. Meanwhile, Apple’s watch – the form factor that’s supposed to be leading the charge – is currently going nowhere fast. We live in a smartphone world, and it’s not clear that anything else is coming along to challenge this. In fact, our phones are instead tending to eat many of the new sectors that people invest in. Activity monitoring and virtual reality (VR) are two prominent formats that the phone appears to be in the process of ingesting.

Eoin: An additional observation is that it’s quite remarkable that startups can now survive outside the public arena for years. Some accumulate eye-watering valuations, before filing for an IPO. That is as much a factor of our low-interest rate environment, as it is of the technological innovation. Private equity firms have been able to source a great deal of cheap capital over the last decade, and this has helped to big-up the price of new companies. When interest rates rise, the flow of capital will slow. That will mean investors will have to be more discerning, and companies may have to file for IPOs earlier.

Andrew: I can’t disagree with Eoin, here. However, it’s also important to be aware that publicly-stated valuations may be “gamed” by late-stage investors – using a dodgy-dealing technique called a “liquidation preference”.

Please do write in with feedback on Snapchat’s IPO: andrew@southbankresearch.com.

Best,

Andrew Lockley
Exponential Investor

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