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Friday, February 10, 2017

Snap Seizes the Moment



Snap Inc. last week filed for a US$3 billion initial public offering.
The company's private market valuation is $17.8 billion, but investors have valued it at between $20 billion and $25 billion, according to a Wall Street Journal report.

"Twenty-five billion dollars is just nuts, but that's the market we're in," remarked Rob Enderle, principal analyst at the Enderle Group.

"This could provide an opportunity for the big gambler investors, but better to watch for the high and then short the stock," he told the E-Commerce Times, because Snap's prospectus "suggests profit will never arrive."


Company revenue last year skyrocketed to $404.5 million, from $59 million in 2015. Losses totaled $514 million last year, compared to $373 million in 2015.
Most of Snapchat's 158 million daily active users, or DAOs, are in the coveted 18 to 34 age group.

"These are the mainstream consumers of tomorrow," noted Andreas Scherer, managing partner at Salto Partners.

That "means it can be the alternative to Facebook and Google that marketers are looking for," he told the E-Commerce Times.

Snap, which has three classes of stock -- A, B and C -- is offering Class A common stock.

"Currently, the stock market's on fire," Scherer said."Even though Snap is nowhere near other companies in this segment at the time of their respective IPOs in terms of revenue and profitability, the time is right for this offering."

Risks Snap Investors face

Among the risk factors Snap has acknowledged are the following:
  • Its user demographic is not particularly loyal;
  • Its user metrics and other estimates are subject to inherent challenges in measurement;
  • The significant competition it faces will intensify;
  • Competitors -- including Apple, Facebook and Google -- are better funded, and changes in their OSes or hardware could impact Snap's products adversely;
  • Its products require high-bandwidth data networks, so are vulnerable to data usage costs;
  • Google Cloud provides the vast majority of Snap's computing, storage, bandwidth and other services, and Google has broad discretion to change and interpret its terms of service and other policies, which could be unfavorable to Snap;
  • Switching from Google Cloud to another provider would be difficult to implement and cost significant time and expense;
  • Snap has incurred operating losses in the past, expects to do so in the future, and may never achieve or maintain profitability; and
  • It has a short operating history and a new business model, which makes it difficult to evaluate its prospects and future financial results, and increases the risk that it will not be successful.
"It's positive that Snap has put together two straight quarters of positive gross profits, which hopefully, combined with the 400 percent year-over-year revenue growth they demonstrated in the December quarter, means they'll eventually have net profits," observed Barry Randall, chief investment officer at Crabtree Asset Management.

However, "it's negative that Snap's cash is disappearing faster than a Snapchat photo," he told the E-Commerce Times. "Their 2016 free cash flow had twice the burn rate of 2015 and was negative to the tune of $678 million."

What Is Snap, Really?

Snap paints itself as a camera company, but the "day before yesterday, they were a social media company," noted Trip Chowdhry, managing director at Global Equities Research.

"Yesterday, they were a hardware company," he told the E-Commerce Times, but "today they're a camera company."

Identifying as a camera company might backfire, Chowdhry warned. "Haven't investors learned from GoPro, which was a camera company? People will put action videos on media channels."

Money for Nothing

Purchasers of Class A stock will have no voting rights.
Cofounders Evan Spiegel and Bobby Murphy each will have 22.4 percent of the company's shares, and control all stockholder decisions. They will retain voting power and control even if they leave the company. If either dies, the other will have control.

Still, revenue growth and DAU growth "are decelerating pretty rapidly for a company this young," Randall warned.

The IPO "will almost certainly be a success, given the slim pickings in the IPO market for high-profile tech companies," Randall said. However, investors will be ready to sell their shares at the drop of a hat, "given the recent flame-outs of Zynga, Groupon, and especially Twitter after their IPOs." 

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