Last Thursday we witnessed the IPO of Snap and its tremendous share price increase during the day. Snap shares ended more than 4o % up, putting the value of the company at the astonishing level of 33 bn USD.
From a rational point of view and based on the facts that we know from the company, this was nothing short than an exercise in lunacy drowning in a sea of ZIRP. Snap is indeed a company that, from the fundamentals point of view, is a gigantic operational and financial bet.
First of all, the operational model is almost designed for never earning money. The company doesn’t´t have its own data centers, making it difficult to achieve the economies of scale that Facebook, Google or even Twitter pursue. As a result, more that 100% of all revenues went to Google Cloud in 2016.
Secondly, the company faces stiff competition from, at least, Instagram, owned by Facebook. Since the launch of Instagram Stories, the growth of the Snapchat app has indeed come almost to a halt.
Taking these two factors into account only (there are more), it is not strange at all that the company lost 514 million USD in 2016. Even worse: The more the company has achieved in revenues, the more money it has been capable of losing. Completing the surrealistic joke of what an IPO should be, we can read a statement in the IPO filings explaining that the company “may never achieve or maintain profitability”.
As I explained in a comment published by the Norwegian financial news site E24.no, there could be three reasons for this bizarre market behavior.
- The market was expecting the Average Revenue per User (or ARPU) to explode somehow. A true exercise in faith.
- The current ultra-low interest rates environment is still luring investors into taking irrational risks.
- Institutional and big investors were selling their shares acquired at IPO price to less informed retail investors, desperate for owning the stock. This was of course the most cynical hypothesis. However, we should take into account that the new shareholders will not have voting rights, which is difficult to accept or any institutional or long-term investor. This IPO seemed indeed designed for misinformed retail investors and speculators.
The hypothesis in my comment was that if the cause of this irrational first trading day was the latter, we should see an abrupt fall of the share price in a matter of days or weeks.
It has taken 96 hours.
Today Snap Inc. erased all the gains from the IPO opening. And as the analytics of the online brokerage platform Robinhood confirm, the median age among Snap buyers at the IPO on Thursday was 26, hardly a group of seasoned investors capable of assessing the high risk of a complicated case like Snap.
The fact is that, once again, hype seems to have chosen to ignore fundamentals, and the retail investors have paid the price of their naiveté and recklessness. As Gordon Gecko said: “Bulls make money, bears make money. Pigs? They get slaughtered.”
Expect a bumpy ride for Snap shareholders in the future. The share price may go up and down like a yo-yo based on rumors and promises of new products and new growth, even if the company eventually becomes profitable. Investors may end up praying for an acquisition, like Twitter already has tried and failed.
This course of events may also have profound implications for other mass-losses Unicorns like Uber or Spotify. They have been waiting for their own pig-slaughtering IPO and may not try it now. It will definitely complicate their financials and/ or growth ambitions and thus their value as private companies.
With a FED rate rise coming soon, we may soon learn what Unicorn blood looks like.
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