snap’s fizzle is business as usual for ipos

Snap, Inc. didn’t wait long to let down its eager investors. Year-over-year, revenues in its first quarter as a public concern were up almost 300 percent, but that badly lagged expectations and even fell short of last quarter’s number. User growth was tepid, as well. The former unicorn gained a mere 8 million new customers over last quarter. The markets don’t tend to like growth stocks that stop growing and Snap’s stock predictably reeled on the news, dropping almost $5 to $18.05, well below its $27 March all-time-high and barely above its $17 IPO price earlier that month. Oh yeah, Snap also lost $2.2 billion dollars, most of it in a one-time non-cash charge for stock-based compensation. At least some people are getting rich off the company. Its shareholders? Not so much.

First and foremost, Snap’s drop is a cautionary tale for anyone tempted to buy into an IPO. Numerous academic studies have shown what a bad idea this is. As a group, newly minted stocks underperform the market over any meaningful time period. The great performance by Snap’s primary competitor Facebook is the exception, not the rule. Most IPOs gap up on the first day of trading, but soon fall off. Many become single digit midgets in a few short years. I’ve been around long enough to see this play out repeatedly across multiple industries. Believe it or not, for a time in the 1980s, the hottest IPOs in the market were in the asbestos abatement business. Like Snap, these companies were afforded grotesque valuations on astronomical growth projections. Like Snap, they all soared on their debuts and gagged shortly thereafter. Many went all the way to zero. A few years later, the IPO craze du jour was CD-Rom education companies. They, too, failed to justify their rich valuations.

Personally, I cannot understand why anyone would use Snap’s goofy service, let alone buy its stock. Most Snap users are kids in their teens and early 20s. Those aren’t groups known for meaningful disposable income. Yes, they are hard to reach. Yes, like Facebook, Snap has a laser ability to target ads to them. But if Facebook is a mind numbing ‘electronic scrapbooking’ site, Snap is an odd mixture of Tiger Beat and Playboy/Playgirl for frisky teens. Which is to say, it is a colossal time waste of time. Most importantly, from an investing standpoint, any teen apparel retailer can tell you how brutally difficult it is to cater to fickle teenagers. They change their tastes and their buying habits like they change their clothes. Maybe the only sites on the internet more at risk of falling out of favor than youth-oriented social media platforms are dating sites. If (or, rather, when) Snap loses its appeal, its user count could collapse—and quickly. That might already be happening. Facebook’s Instagram launched a virtual copycat version of Snap’s platform a few months ago and it has already surpassed Snap’s user count. Meanwhile, Facebook’s main site has become the go-to social media platform for middle aged and older folks. Those consumers don’t tend to switch to the hot new fad when it comes along. Most of them will probably keep on using Facebook until they die.

If Snap’s user count continues to disappoint in subsequent quarters, its stock will be valued on a multiple of EBITDA, not revenues. Given that Snap is hemorrhaging cash, that would push it into negative territory. Not good. I am not short Snap’s stock, and probably will never be, but it could easily make Twitter look like a good investment. The same goes for its former unicorn brethren, like the ride sharing giants Uber and Lyft. Uber, like Snap, is incinerating cash. Unlike Snap, Uber is a commodity service. Yes, most of its users prefer ride sharing to cabs. I know I do. But I and everyone else who uses the service will gladly jump to a competitor if they offer a better deal. That means Uber’s breathtaking topline growth will likely never translate into meaningful profits margins, which means its all-time high valuation as a private or public concern is probably right now. At some point, after the hope and hype for the future fade, all public companies trade on a multiple of earnings. If Uber ever gets public—and that might be the only way its current investors make a decent return—the same rules will apply. Contrary to popular belief, things are never “different this time.”

An interesting side question is whether the ride sharing industry continues to decimate the rental car business. Hertz and Avis both turned in terrible first quarter results. Both are selling at 52-week lows and both have big debt loads. As ride sharing becomes more common, especially at US airports (where car rental firms generate their highest profits), these companies may be forced to reorganize (ie, file bankruptcy) as they downsize and figure out new ways to compete.

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