$SNAP in NYSE

Snapchat IPO: Why Not to Invest in $SNAP and Overhauling Snapchat

On March 2, 2017, snap (SNAP), the parent company of Snapchat, went IPO and its stock opened shortly before 11:20 am on Thursday in New York. It initially started to trade at $24/share, rising 41.2% from its initial opening price of $17/share on Wednesday.[1]

As of Friday March 3, 2017, $SNAP stock rose 20%, rising above $29 a share and ended the day at $27.09, up 11% for the day. Based on the stock price and the number of shares, the $SNAP IPO is currently valued at $33 billion.

Despite this strong hype on $SNAP, there are concerning factors regarding its price, as many investors are looking for ways to understand its value, including the founders’ hesitation to give up shares, slowing user growth per month, the increasing level of operation costs, the decreased revenue, and the negative WSJ and Barron rating of “Sell”[2].

$SNAP stock in last three days

In my investing experience (having earned nearly 400% return in investing Sprint $S [+3000 shares] during its $2.5/share period and selling on $9.5/share, along with investing in $AXTN and $PGND during its IPO with final stock sales at their highest price/share), I think I can comment that $SNAP has the wrong long-term value, but only of the short term goals.

Value Investing Criteria for SNAP Stock
1) Financial Statement & Metrics
2) Nature of the Business & Target Audience
3) Senior Management Team Experience
4) Competition in SNS & Mobile

1) Financial Statement & Metrics

Snap’s filings with the Securities and Exchange Commission presented the first chance for outsiders to review the company’s financials. According to Reuter, it says:

“Snap had $404.5 million in sales in 2016, up from $58.7 million in 2015. However, it had a net loss of $514.6 million in 2016, up from a net loss of $372.9 million in 2015. … Snap had 158 million active users in 2016, up 48 percent from 2015.”

This statement implies that Snapchat went IPO to raise necessary funds to cover its revenue loss and debts. It’s classic move of “debt financing through IPOs”. But most importantly, it can hint potential future decreasing revenue, and requires further review of its IPO SEC statement. I don’t believe hype, but would rather understand where $SNAP values come from.

We would need to look closely to its IPO financial information, including P/E (Pricing-to-Earning Ratio), operating costs, R&D investment, business future plan, debt-to-equity ratio, free cash flow, if you are looking for value investing[3]. *Unknown to many, the actual cash that a company brings in is very different from its quarterly earnings report. This is because the company follows on accrual accounting using the GAAP (Generally Accepted Accounting Principle), and not the actual balance in the corporate account. Thus, the news report on the profit would be inaccurate portrayal of the $SNAP.

2) Nature of the Business & Target Audience

Back on Nov 2013, Mark Zuckerberg aimed on purchasing the Snapchat since he knew the audience gap of Facebook and Instagram. Facebook had the large portion of older audience (age 35 and over), while instagram had the younger audience interest between age 18 and 29. Snapchat fitted right in between those two target audiences – Teenagers. With majority of 33M visitors/month, the Snapchat built its audience niche through using “disappearing message” and was trending on “sexting app”. It wasn’t originally to share ideas, information or opinions or network with others.

The most difficult part of the teenager-audience app is the revenue generating model and for two primary reasons: (1)Fleeting Audience Characteristic, and (2)Questionable Purchasing Power Influence.

According to Mary Leigh Bliss, trends editor at YPulse, a youth-focused market research firm, “The challenge with this generation of teens becoming the new gatekeepers, however, is that they’re less loyal to brands and businesses than the generations that came before them”. Although this audience has been at best for delivering and sharing the latest app to the adults, they are more loyal to the best in class brand rather than the brand itself[4].  Thus, it is very difficult to predict the acquisition length of the audience – In other word, they can move from trend to trend easily, and aren’t the most stable audience for long-term profit.

Based on the Fona International report, the teenager audience still holds some level of purchasing power, driving about $208.7 billion and nearly creating total of $91.1 billion income. See below for the power facts.

Teen Purchasing Power Fast Facts include:

  • 25.6 million: Number of teens in the U.S. (13-18 years old.)
  • $208.7 billion: Total U.S. teen spending. (Products bought by and for teens.)
  • 18%: Amount of their income teens spend on food.
  • 14x: The amount of more money spent by adults, as a proportion of their
    income.
  • 63 million: Number of kids who are affecting purchases when adding in 10-12 and 19-24 year-olds.
  • $91.1 billion: Total annual teen income in the U.S.
  • $117.6 billion: Annual amount of money families spend on teens for food, apparel, personal care and entertainment. 

Majority of the food-related purchases are driven by teenagers influencing their parents (See below info – Source from FONA research).

• 90% restaurants

  • 88% snacks
  • 87% cereal
  • 83% beverages

Despite this huge influence, this revenue is generating specifically from niche group – snacks, restaurants and fast-food consumer products. Parents are influenced 56% to buy the teenagers recommended food/snacks, but what about the purchases in the clothing, electronics, sports, high-end goods, or B2B products? These industries have much higher priced products, ranging from $100 to several hundreds of dollars.

Based on these two perspectives, there is impending danger on how to sustain the business, and question as to whether the “snapchat” can capture the more stable adult audience for long-term profit.

3) Senior Management Team Experience

Unlike Facebook CEO Mark Zuckerberg, the founders at Snapchat had a previous unsuccessful startup, and failed in their app development while at Stanford University. They had no formal successful startup experience, and only had few years of work experience, along with the idea for an teenager app. Additionally, when looking closely and comparing with other investors fund, Snapchat raised fund from a local high school and accidentally through a teenager’s VC parent.

The most important reason for not investing in Snapchat is due to their lack of transparency with their most important investors. According to SEC review, The company may disclose some information to investors up to four days after a material event has occurred, the filing states. In the filing, Snap also calls itself an “emerging growth company” under U.S. law, leaving it free to exempt itself from some reporting requirements. To block the investors from knowing the future plan or direction of the business is a sign of distrust within its board member team, even hinting potential political problem within its shareholders. The founders are preferring to have total control of the company with disclosing its vital information several days behind the press releases.

4) Competition in SNS & Mobile

A difficult part of maintaining SNS company is keeping up with the “innovation” against the new incumbents. Most often top companies have to maintain its innovation through new R&D investment, acquire new startups or IP or patents. Many successful firms have withdrew their public stocks, focused on internal innovation growth, and become more competitive in the changing industry trends, including Dell, LEGO, Press Ganey Holding, and top companies.

Few of the top new entrants that rival Snapchat include Whisper, Wickr, and Slingshot. They’ve managed to grow slowly, and reaching the similar achievements as Snapchat. We would need to look closely at their unique business proposition and features.

Shown below are the description of the product and related links.

Whisper
Whisper is an online community where millions of people around the world share real thoughts, trade advice, and get the inside scoop. It is a proprietary iOS and Android mobile app available without charge, which says that it allows users to send messages anonymously, and to receive replies[3].

According to Adweek, as of November 2016, Whisper has over 30 million monthly active users, with 17 billion whispers being seen each month by 250 million people across Whisper’s app, mobile and desktop websites, social channels and publisher network.


Wickr

Wickr app screenshotWickr is an instant messenger for Android, iOS that allows you to send ‘end-to-end encrypted’ and volatile messages in the form of texts, pictures, videos, files etc. As we all know, it’s like an alternative to Snapchat as the messages sent on Wickr too are self-destructive and disappear after few minutes.
Based in San Fransisco, Wickr kickstarted in 2012 as an engaging and unique instant messenger.  Its instant messenger was approved to be one of the most secure IM available now. It’s really a commendable job to be reliable and secure in this age of cyber crimes. Every American auditor and International reviewers have given Wickr full marks about security.

With Wickr, you can also send media files to your connections without leaving any trace. It also allows you an option to add filters and edit your image before sending. To add friends, all you need to perform is a simple search and Wickr allows you to invite your friends who are not on Wickr.


Slingshot

Slingshot app screen
Founded by Facebook Inc, Slingshot (available in Android, and iOS) is another instant messaging app that can be termed as an appropriate alternative to Snapchat. It allows you to send messages that are temporary. The different thing about Slingshot is that you can respond to your friends media by creating your own cool and funky photos or videos[4].

Once you click a photo or video, there are two options available: (1) You can either choose the ‘reshoot’ option if your photograph or video isn’t what you expected, and (2) the another option is draw which means you’re fine with your output and you’re ready to edit it and send.

Summary
Given the competitive SNS business environment, along with the troubling financial statement, the lack of trust within the senior management with its shareholders, and the nature of its fleeting teenager audience, I wouldn’t advice on investing into this company for the long-term profit.


How would you evaluate $SNAP Stock value? Share your opinion below!

If you found this article helpful, then please follow me on Twitter and LinkedIn. Daily post will be up on weekly basis. Thank you!

Follow me on Twitter @danielhKim2
Follow me on Facebook @hyunkim85
Follow me on LinkedIn @danielhkim2

 

To Read My Other Latest Post

Design of Price and Advertising Elasticity Models
What is Brand Value Chain Model?
How to Develop Promotional Marketing Strategy – Step by Step
4 Don’ts and 4 Do’s in #hashtag Campaigns
Building a Basic Twitter Marketing Scheduling System (Excel Form)


SOURCES

[1] Balakrishnan, Anita. “Snap Closes up 44% after Rollicking IPO.” CNBC. CNBC, 02 Mar. 2017. Web. 06 Mar. 2017. http://www.cnbc.com/2017/03/02/snapchat-snap-open-trading-price-stock-ipo-first-day.html

[2] Bary, Andrew. “Snap’s Stock Price Could Be Cut in Half.” Barron’s. N.p., 04 Mar. 2017. Web. 07 Mar. 2017. <http://www.barrons.com/articles/snaps-stock-price-could-be-cut-in-half-1488609430&gt;.

[3] Elmerraji, Jonas. “5 Must-Have Metrics For Value Investors.” InvestopeRdia. N.p., 17 Oct. 2016. Web. 06 Mar. 2017. http://www.investopedia.com/articles/fundamental-analysis/09/five-must-have-metrics-value-investors.asp

[4] Lapowsky, Issie. “Why Teens Are the Most Elusive and Valuable Customers in Tech.”Inc.com. Inc., 03 Mar. 2014. Web. 06 Mar. 2017. http://www.inc.com/issie-lapowsky/inside-massive-tech-land-grab-teenagers.html

[5] “Whisper (app).” Wikipedia. Wikimedia Foundation, 06 Mar. 2017. Web. 07 Mar. 2017. https://en.wikipedia.org/wiki/Whisper_(app)

[6]Mitroff, Sarah. “Slingshot (Android) Review – Too Complicated for Its Own Good.”Cnet.com. Cnet., 20 June. 2014. Web. 06 Mar. 2017  https://www.cnet.com/products/slingshot-android/review/

One comment

Comments are closed.