Tag Archives: Snapchat

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.

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tech stocks are still seriously overvalued

Seventeen years ago, I had a front row seat for the nuttiest mania in stock market history. I vividly remember visiting now failed companies like Quokka Sports, Planet RX, Women.com, and Commerce One and listening to their managements confidently predict glowing futures. These firms, and many more, sold above 100x revenues–and they were far from the most overvalued stocks in the market. Other public dotcom companies had no revenues at all. Their stocks soared on nothing more than hopeful business models and lofty expectations of explosive growth.

I was in the ninth year of managing my hedge fund in 1999. It gained 8 percent that year, badly lagging the S&P’s 19 percent return and the Nasdaq’s staggering 85 percent (!) gain. In March of 2000, the Nasdaq hit an all-time high of 5132.52. Then, on March 20th, Barron’s magazine wrote a much publicized article that listed every dotcom by its cash, monthly cash burn, and the number of months before each company would run out of money if it did not raise additional capital. There were 207 companies on that list. A large number went broke. Some of those flameouts, like Pets.com, live on in infamy. The majority of them are only recalled by hardcore stock junkies, especially those who got burned by their implosion.

Remember Be Free, ZapMe!, SmarterKids.com, drkoop.com, and MotherNature.com? Most investors under the age of 35 almost certainly don’t—and that’s a problem, because what happened to those businesses could easily happen to many of the new tech sector darlings. Far more companies in today’s public and private markets will probably become tomorrow’s drkoop.com instead of the next Amazon or Microsoft. And as we saw so vividly in 2000, when the end comes, it comes quickly.

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today’s tech boom is missing something: technology

I’ve been buying and shorting tech stocks since floppy disks were floppy. In all that time, I’ve always been amazed at the steep premium investors are willing to pay for anything even remotely tied to the sector. In the 1990s, all you had to do to command a massive valuation was slap a “.com” onto your name. That is not an exaggeration. In 1998, I shorted a company called 7th Level that was two weeks away from running out of cash. It changed its name to 7th Level.com and its stock jumped from $2 to the mid-teens in a single day. These days, private companies in the tech space–so-called “unicorns”–are all the rage. Few, if any of these billion dollar babies have earned a cent. Commonsense says most of them never will. And yet, VC firms and other private backers are perfectly willing to throw more cash at them in round after round of financing.

Investors justify these lofty valuations with fanciful TAM guesstimates and accelerating revenue projections. This is nothing new. It’s the same wishful thinking that drives all manias, tech or otherwise. But what seems different to me about the current tech boom is just how un-technological most of the players are. Uber lets you hail someone else’s car, AirBnB lets you sleep in someone else’s bed, and Snapchat lets teenagers erase naughty messages before their parents see them. It’s hard to see any significant technological moats around those ideas.

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