Oh SNAP! An IPO like no other?

Snapchat has taken its sweet time to go public since co-founder and CEO Evan Spiegel hinted in 2015 that the company needed an IPO. But the time for Snapchat (whose official name is now Snap Inc) to go public has finally arrived. This week,  200M Class A Common stocks went public, and what an entrance it made. Up 44% in its debut and another 10% the day afterwards, there’s a lot being priced into the hopes and dreams of this millennial phenom. Whether shares hold their value or have it disappear like the ephemeral messages that drives its popularity remains to be seen.

The chatter: why SNAP’s Class A common stock offering gives investors the jitters

The investor circle is making a lot of noise about the stock structure that SNAP rolled out this week with its IPO on the NYSE. There are A, B, and C level stocks, with only 200M Class A common stocks available to the ‘main street investor’. Remarkably, the Class A shares are non-voting stocks that anyone can buy—and that’s what the noise is about. No votes? So you can pay, but you get no say (although apparently you can still attend the AGM). Class B stocks are reserved for executives and early investors and carry one vote per share. The Class C stocks are held by CEO Evan Spiegel and co-founder CTO Bobby Murphy. Each of these stocks carries 10 votes. That means all the votes are held by the early investors and the co-founders, and the co-founders maintain a stranglehold of nearly 90% ownership in the company through the stock structure and vote-rich Class C stocks.

Snapchat founders ring the opening bell at NYSE. (screenshot of NYSE website).

The stock structure: SNAP IPO not that unique

It’s not the first time that an IPO has structured itself so founders and early investors maintain control of shares—that also allows them to retain a controlling interest in what happens with the product they created, after all. But usually investors receive at least a token vote on the shares they buy, even if majority interest remains elsewhere. SNAP isn’t even trying to pretend they’re offering any real say in their company, and flat out said so in their IPO filing: “to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange”. So the question investors need to be prepared to ask themselves before investing is: what’s my level of confidence in the founders and developers of SNAP?

SNAP’s IPO: comparing SNAP to Facebook and Twitter

It’s impossible to watch yet another social media IPO without thinking back to Facebook’s bumbled opening with Nasdaq, and Twitter’s better opening, but later less successful, offering. Biographical comparisons are also hard to avoid between SNAP’s co-founder, Evan Spiegel and Mark Zuckerberg. Both are university drop outs, and both had expensive fights with turfed co-founders they had to pay off to shut up.

Facebook went public five years ago in 2012, stalled at opening by technical glitches. In part, the Nasdaq couldn’t handle the huge demand for the stock. Facebook hiccuped—Nasdaq got sued (a couple of times) for its bungling of the IPO—and for months the stock roller-coasted, at one point below $US29 after opening at $US38 and climbing as high as $US45 the first day.

Twitter hit the ground running in 2013 at $US44.93 and quickly climbed to $US69 before plummeting like a stone year over year to its current valuation of just under $US16 per share. Facebook now sells at a cool $US137, nearly the same price as Apple stock. What happened? And can we use the lessons of Facebook and Twitter to predict SNAP’s trajectory?

Facebook was already a giant in the industry when it went public. It had 483M daily users, $3.7B in revenue, and a positive net income of $1B. SNAP has barely one-third as many daily users even today, at 158M, revenue of $404.5M, and posted net losses of $514.6M in 2016. At first blush, SNAP looks a lot more like Twitter when it went public in 2013 with 100M daily users, revenues of $317M, and a net loss of $79M. What’s different?

SNAP: it’s about the next generation of internet users

SNAP has a private valuation of about $18B, a strong user base of under 30-year olds, especially in Europe and the USA, and a group that does not want to use Facebook (mostly because their parents use it). But a Business Insider graph tells a possibly different tale.

About 45% of SNAP’s users are under the age of 24; that amounts to about 71M users. Facebook has about 16% of its users in the same age range. But FB’s total daily user number is 1.2-1.65B, meaning at least 192M users are 24 or younger . . . hmmmm. Still, Zuckerberg is concerned enough about SNAP that he unsuccessfully tried to buy the company for a rumored $3B. He did buy Instagram, a direct SNAP competitor, in 2012 for $1B. Since then, he’s copied SNAP’s upgrades, notably Snapchat Stories, but it doesn’t seem to be stemming the tide of kids clicking in Snapchat.

The thing that’s different is that SNAP is visual, not text-based, and the snaps you send only last a few seconds before they dissolve. Given the growing concerns about internet pornography and not knowing where your data might be going (and whether your parents, teachers or the police might see it), SNAP is a popular choice to avoid these potential problems. It also changes the way the net is used, something that FB may not be able to compete with, no matter what it does with Instagram. It’s just seen as yesterday’s app to a user group that changes its whims with the wind . . . . SNAP is just where it’s at.

IPOs: buying SNAP . . . take a number

SNAP is the biggest social media company to go public since Twitter, back in 2013. There are multiple underwriters including Morgan Stanley and Goldman Sachs who are leads on the deal. The way IPOs work is that shares are sold to major investment banks, broker dealers and dealer-investors, usually in large numbers. It’s just easier when you’re trying to sell millions of shares to sell to the big guys who can afford to buy them in bulk. These get distributed to investors. It can be hard to participate in an IPO just because the average investor is usually only buying a relatively small number of stocks. This pent up demand for ‘retail investors’ to participate in the hype is likely one of the reasons why SNAP rose as much as it did on its debut and first full trading day.

Are IPOs a gamble? Well, FB’s rocky start has since turned in a stellar performance. Their initial 108B valuation has almost tripled: FB is worth about 382B today. And Twitter? Worth roughly one-half their initial valuation of $24B in 2013. Where will SNAP end up? Your guess is probably as good as anyone’s . . .

 

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