Snappy Collapse

Posted: 26th April 2017

Overview

It's been a whirlwind of turbulence for the highly anticipated IPO of Snap Inc (SNAP, NYSE). Snap aimed to entice retail investors to buy into their early March IPO by emphasising the app’s strong impact on mobile device users around the world. Investors, however, lost much of their capital on the forefront as the company has been tagged by Fortune 500 as one of "Wall Street's Biggest Flops". As such, investors have felt the heat as the loss making parent company of Snapchat failed to rally as investors hoped it would.

Source: Nasdaq.com

The Snap Business

Snapchat, the main subsidiary of Snap Inc, is now a daily feature of people’s entertainment. With the modern concept of emphasising providing platform over products, companies like Snap provide enable an accessible platform for users to share a snippet of their daily life with an added filter (preferably for most people the dog filter) for a private audience. While this audience previously only extended to friends, now the option to share content with the world at large.

The app has also recently become a media outlet accessible to anyone with a mobile phone, thus extending the company’s reach far beyond its original user base. Snapchat now provides instantaneous viewing of daily feeds from Cosmo and Buzzfeed that people can view whilst waiting for their best friend's life story to load, thus differentiating the app’s style from more traditional print and online journalism. The convenience, accessibility, and reliability of the site is unique amongst its competitors.

Now 43% of its generated revenue at $150 million, the prominent “Discover” feature is one of the powerhouse features driving Snapchat earnings. The rest is derived from other advertisement on stories, licensed use of filters and publishing of custom geofilters. The shortfall to this however is that advertising revenue is mostly shared between partners of the content. Therefore draining Snap’s generated revenue as reflective of its current negative free cash flows.

Snap has also been at the forefront of transforming informal written language. App users can express themselves through Bitmojis, personalised “stickers” that users can add to an otherwise uninteresting text message. A subsidiary of Snap, users add Bitmojis to their everyday conversation, images or even videos to give the context a mood or emotion, depending on the user. Acquired in 2016, Bitstrips has now been effectively transformed into the Snapchat app itself.

More Reach

The Californian based company looks to continue its expansion into the $652 billion global advertising market, as indicated in their IPO statement. This move capitalises on the trend of consumers rapidly transitioning towards platform media, whilst abandoning magazines and newspapers. The media industry continues to gauge user experience needs of current newsreaders through online material. Snapchat’s solution engages all audiences visually through outlets on a simple platform, thus allowing users to explore the majority of the global social media news outlets on its service.

Another interesting development is the growing use of Snapchat as a part of recruitment processes in business. For example, some McDonald's outlets in Australia now use custom Snapchat filters to gather a ten second impression of the applicant before progressing them through the application process. This trend has the potential to help Snap access a new market space. Junk or genius?

Actualisation


Snap

Google

Facebook

Twitter

IPO Price

$24

$54.21

$38.23

$41.65

1 Month Stock Price

$22.35

$50.06

$33.05

$44.95

Percentage Change

-6.88%

-7.67%

-13.55%

7.92%

Current Share Price

$20.19

$858.95

$143.68

$14.63

Percentage Change Since

-15.87%

1484%

275.83%

-64.87%
Source: Yahoo Finance

Snap first opened at $24 USD on the 2nd of March and rallied to a high of $27.09, valuing the enterprise initially at $28.4 billion. Snap soared on the first day of trading as speculators jumped on the opportunity to follow the rapidly growing tech giant and its rising stock. This all turned when Snap slumped into a 13 day downtrend on the back of several items of bad news in regards to the company’s potential performance. Snap currently trades at $20.19, and despite the above table illustrating sporadic behaviour amongst large tech IPO is common in the first month, the overrated IPO buckles under aggressive competition whilst and succumbing to concerns over credit quality.

Snapchat has a number of partnerships, including the use of Foursquares to power Geofilters, Google (a negotiated $2 billion a year negotiated deal) for its cloud services, and a 50% reliance on ad revenue in collaboration with the multitudes of companies featured on its “Discover” panel. The smartphone app startup suffered initial backlash after revealing that a hefty sum of its revenue wasis being shared between partner companies. As debtholders have priority over shareholders, the announcement alarmed investors on Snap’s credit assurance.

Commonly experienced in the social media business however, most companies wouldoften heavily invest in its early stages of operation to make the right impact in its market, resulting to large negative cash flows. Snap utilises a platform service whereby users create value on the platform itself for other users to consume and enjoy. This aligns with your typical social media companies, however it requires extreme upstream effort to provide a distinguishable platform from competition, maintain both platform users and consumers, and eventually encourage consistent production of value from users. The investment in research and design explains why it is no surprise Snap currently experiences such negative cash flows, which now it mustneeds to sustain growth and revenue in the long term to deem the platform successful.

First 5 years of net income for Large Tech companies:


Snap

Google

Facebook

Twitter

Year 1

-$56 million

$7 million

-$138 million

-$79 million

Year 2

-$200 million

$99 million

-$56 million

-$645 million

Year 3

-$377 million

$105 million

$229 million

-$577 million

Year 4

-$515 million

$399 million

$606 million

-$521 million

Year 5

-$600 million

$1.46 billion

$1 billion

-$456 million
Source: statista.com

With Facebook pursuing a Snapchat makeover with the introduction of mimical features, itthis places downward pressure on the company’s already negative free cash flow of $677 million in its fifth year of operation. Questions are raised as to how Snapchat can be worth $25 billion with more than negative half a million in net income. Instead of expanding as expected, Snapchat’s market share is seemingly on the slide as a result of the aggressive approach taken by competitors in intruding on Snap’s niche features with a copycat “story” mode and instant sharing of multimedia materials.

Facebook is pretty much eyeing war to expansion of Snap, and what better way to do so than distributing the timely competition immediately after Snap’sthe IPO. Remember what Zuckerberg did to combat competition from Twitter? By transforming the Messenger app to its dominance today. They also acquired Instagram, then an emerging mobile photography application. With Snapchat looming as the next social media phenomenon, it is uncanny that Facebook would boost their product offering with enhanced features to combat Spiegel’s attempts to gain market share at their expense.

Lastly, the sales of no-vote Class-A shares during the IPO was heavily criticised by Wall Street analysts. Some institutional investors campaigned against the inclusion of Snap on large indexes. Given Snap’s current market valuation of $23.2 billion is adequate for the S&P500, the company’s stock could benefit from the potentially index buying.

Conclusion

Some analysts speculated that Snap will follow in the footsteps of Apple and Facebook prior to the IPO, ascending into a common portfolio blue-chip. The aftermath of this one month slide may indicate an otherwise similar feat suffered by the Twitter stock couple years back. CEO Evan Spiegel now has a lot to consider in regards to corporate strategy and the uncertain future of Snapchat's market share.

References