A lot has been written about Snap Inc and the stock price and I can’t help but add my two cents. Snap Inc sold shares to the general public on March 1 2017 and on March 12 2017 a reporter, Angela Moon, wrote an article for Reuters essentially talking about how millennial investors extended their affinity for the product to buying the stock at IPO. For the article several investors were interviewed. From time to time I’ll refer to them starting with one 25 year old who had been trading stocks on Robinhood for a month and bought some shares at $25. Assuming he is still holding onto those shares, he is down about $10 per share, about 40%.
In a previous post I explored investing as a millennial. In this post I’ll explore Snap Inc since its sexy, topical and in tech and also Snap-on Inc which is, well, none of that, maybe. My hope is that newer investors can expand their universe of investing options.
If due to a butt dial or a “fat finger” our 25 yr old had clicked on “sna” instead of “snap” he would have bought Snap-on Inc which was incorporated in 1930. Although a smaller company by market cap ($9B vs Snap Inc $17B) and not as “sexy,” according to their SEC filings, this company is a manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions. (Does all that constitute a good dose of technology?)
The Company’s segments include the Commercial & Industrial Group, the Snap-on Tools Group, the Repair Systems & Information Group and Financial Services. (Sounds like a well diversified company)
The Commercial & Industrial Group consists of business operations serving a range of industrial and commercial customers around the world, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments, primarily through direct and distributor channels.
If you happen to be driving around early in the morning you would notice “Snap-on” trucks roaming around town on their way to deliver products to your local vehicle repair shop. Their Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the Company’s mobile tool distribution channel.
The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers, primarily owners and managers of independent repair shops and original equipment manufacturer (OEM) dealership service and repair shops, through direct and distributor channels.
Financial Services consists of the business operations of Snap-on Credit LLC (SOC), the Company’s financial services business in the United States, and the Company’s other financial services subsidiaries in those international markets where it has franchise operations.
On the other hand Snap Inc. is a camera company.
According to their SEC filings, they believe that reinventing the camera represents their greatest opportunity to improve the way that people live and communicate. They state that their products empower people to express themselves, live in the moment, learn about the world, and have fun together.
Their flagship product, Snapchat, is a camera application (software) that was created to help people communicate through short videos and images each appropriately named a Snap. On average, 166 million people use Snapchat daily, and over 3.0 billion Snaps are created every day. On average, their users spend about 30 minutes on Snapchat every day.
In short its about photos, chatting and video: interact, communicate, entertain self and others for half an hour each day.
Is it air freshener or soap: nice to have vs must have?
To monetize their product, Snap Inc depends on advertising, primarily from the US, and each user is worth about $0.90 per the last quarter.
In the $66B mobile advertising space both Google and Facebook take 70% of the ad dollars.
All businesses are all about a customer base and revenue with the goal of a profit at some point. In the first quarter of 2017 Snap on Inc brought in $887M in net sales, $448M in gross profit and $145M in net profit while Snap Inc brought in$150 M in revenue and no profit. This is not an apples to apples comparison just a statement of fact.
So how will Snapchat grow its revenue? On a recent interview an analyst on CNBC was talking up revenue from selling sponsored lenses and geofilters. I had my Yogi Berra moment: it’s like déjà vu all over again: 2012, Zynga, IPO, FREE PRODUCT, analysts championing in-game sale of virtual goods: turns out only 2% of Zynga gamers pay for the goods. Have you seen the losses at Zynga ($226M, $122M, $106M in ’14, ’15 ’16) better yet check out their stock price. At IPO Zynga was valued about the same $7B as Electronics Arts (EA), the maker of Madden and everything else gaming. Currently, Zynga is valued at $3.4B while EA is valued about $34B and profitable.
Snap will sell some filters, just like Zynga sold sponsored virtual Starbucks stores on Cityville but will it be a reliable long term revenue stream?
Remember the ringtones craze. Supposedly they were gonna save a dying music industry in the age of pirated and illegal downloads.
Like Kodak, the days of heavy equipment and harsh chemicals in consumer photography are gone. The days of big industries and huge earnings in the sector are gone. It’s the fulfillment of a world switched from analog dollars to digital pennies. That’s what Snap is fighting for alongside Facebook in a Network effect, winner takes all world. I’m not declaring Instagram winner but with a parent like Facebook odds are against Snap. Sure there is room for both and maybe even more since for every Youtube there is Vimeo.
People are all worked up about copycats in the social space. News Flash: in the age of the Internet, social and mobile, there is not much defensible Intellectual property.
To counter this Silicon Valley created a new moat: cold hard cash. The more a startup raised the more runway: time to suss out a business model and the more defensive they could be. Money poured in to the startup world from all over the world which helped inflate startup valuations. IPOs have thus become a gamble for the regular guys.
The consumer facing startups like GoPro, FitBit and Zynga attracted attention pre and post IPO but have not delivered as public companies and it will still take time. Is this the fate awaiting Snap Inc and Blue Apron?
Public markets are very demanding and unforgiving, quarterly asking about user growth rates and other such amorphous metrics. Just check out twitter and the never ending comparison to Facebook user data.
The $17 price point for Snap IPO was on the lower end. Pre-IPO Blue Apron was said to be valued at $3B, It IPOed (that a word?) at $1.89B and now valued at $1.22B. Are there down rounds coming up for the current Unicorns and other highly valued (overvalued) startups?
In the world of Economics, Humans and Investing, bubbles do happen: Irrational exuberance. For the last few years people have been decrying valuations in startup world with some calling it a bubble. For VCs this can be led by pure greed, fear of missing out (FOMO), lack of courage in investing, lack of ideas(there is an uber for this and an uber for that), easier access to capital, among other factors leading to too much money chasing too few startups.
The LPs who invested with VCs gotta get paid. Founders have to get paid. To unlock startup value Wall Street is always willing and able to release startup shares to the wild, sometimes to an unsuspecting public.
At Such times VCs hype their investments, founders hype their baby and Wall Street hypes its underwriting.
One thing VCs are well aware of is investing is risky. To counter this they invest in multiple startups to diversify their risk exposure. For instance a firm may invest in 20 companies expecting 2 great outcomes, 11 so sos and 7 duds.
Likewise their counterparts on the Street are experts at risk management with tools like diversification, options and among other exotic derivatives.
One of my early lessons on how Sand Hill and Wall Street always win (The House always wins) was in then public traded drugstore dot com. The stock was not doing well and going through their annual reports I came across some information on how a prominent VC firm had converted their shares to debt and getting paid exorbitant interest rates.
You know how else they win? VCs and Wall Street get their shares Pre-IPO some for $0.0005 per share. Even if they come in later at $4 per share, an expected IPO pop will reward them well. Does it matter if they cash out one year later or never at all, not really as long as their holdings are positive. Generally, the IPO pop is driven by the general investing public hoping to catch the magic but VCs and the Street types are already riding the magic. Does the public benefit early on in an IPO, depends, just be careful.
I’m not anti VCs or anti Wall Street just stating my observations in the current system. If anything, when I grow up I may have a start up and would likely go to these guys for funding. The key here is both sectors are basically run by money managers either for LPs or for investors and their interests are to maximize returns for their backers. These are professionals and we the small investors better up our game.
Remember its in VCs nature to take hatchlings and nurture them. Their drive is to turn them all into Whales but by its nature a minion can only grow so much.
One of the ladies interview for the article said “There are a lot of companies I don’t know or recognize…..” Discovery is a major problem (friction?) in Investing. Engaging more and learning more helps expand ones knowledge. Joining an online or better yet an offline investment club helps. Going up and down the value chain of a potential investment helps. For instance if you have to buy a speculative stock like Snap, how about you buy small amounts and also play the space with say American Tower Corp the operators of those cell tower you need to access your apps. Not sexy, not tech enough for you, how about the chip maker Nvidia after all feels like we are living in a virtual world, might as well invest in one of the architects.
In Wall Street Speak there is smart money and we the general investing public are not it.
Investors have to be more discerning otherwise they end up as collateral damage in a game that can be stacked against them.
Also investing in stocks should involve a well diversified strategy: manage your risks!
Millennials, just like everyone else, have to be willing to learn about investing. It’s a skill and you get out what you put in. They have to be active participants in their financial decisions and this truly happens when one is informed and aware.
The lady mentioned about further stated “I use the product, and know everyone — my friends, my co-workers, even my parents — uses it.” Most investors would go with the same thought process but take it a little further with their research: the business model, what are the financials like, what other products and services do we use and others use as well like the stodgy insurance, water companies. Does anyone go for an extended period of time without paying their electric bill absent solar? As I write this and watching CNBC Cintas Corp is up 9% (market cap 14.7B and dividend yield 1.33%). They equally have white trucks and you have seen them around town picking up and delivering laundry. Investing ideas are all around us and in every day stuff.
The bigger part of most investments should be aimed at companies with a clear path rather than venture into the unknown and uncertain for excitement and possibilities.
For some, investing is like an adventure with thrills and risks but if we approach it as a way to incrementally accumulate a nest egg, store some acorns for lean times, we would be much more informed and calculation in our risk profile.
The reporter on the Reuters article, Angela Moon pointed out “ for some millennial investors, loyalty to one of their favorite apps matters more than financial details in the case of Snap Inc.”
My biggest worry for newer investors in getting seduced by a topical stock, getting all in financially and emotionally and if the outcome falls short of expectations, such investors can swear off investing for life. Happened in the great depression, great recession, happens every day.
Everyone remembers their first anything: kiss, stock, job. If you became an investor because of Snap, great. If it was Facebook, ride on! Everyone should be an investor. Like everything else we get into, career or romance, a long-term relationship should go beyond infatuation. Getting in should be seen as a first step in a marathon. Stick it out, build endurance and keep learning.
Investing in companies like Snap is in part driven by hope: hope of a developing business model, hope of a future product, some say in VR, AR, AI or such. As we have witnessed, other companies are also in the space and competition is fierce. With deep pockets Facebook, Google, Microsoft among others will continue to research and produce products at a fast pace. The costs of rolling out such products are also coming down fast meaning many more competitors are looming around.
In the end bills have to be paid and investors compensated for their risk. There is no better place than Wall Street, which votes with the stock price, to gauge the the long term viability of a company. The Street is demanding and, where Zynga did not EA did.
Is gaming social? You bet. Is it casual? Not if EA has something to say about it. It has become a spectator sport filling stadiums from LA to Seoul, with chants and taunts like any other sport. With their esport league (Overwatch) rolling out in a city near you expect even more.
It may be a tough go for Snap.
I remember the days when the likes of Charles Schwab and E-Trade disrupted the brokerage industry with cheaper online access to the markets. Greatest of times! The likes of Acorn, Robinhood and Stockpile strive to extend that access with lower costs and great user experience. As always some will survive while others will not but the general investing public will continue to benefit from access to markets, lower costs and access to research. These apps have sex appeal and will continue to bring in younger investors into the ownership class.
Snap Inc is in a fickle business where the shine can wear out fast. Before the shine wears out some great entrepreneurs morph into great business people. Some of these founders are or have been so driven that adjectives like combative and megalomaniac are permanently attached to the names.
What it was like to be a fly on the wall at Steve Jobs “meetings?”
Just what did Bill Gates and co have to do to win in the Office Applications? Oh, remember the browser wars?
I bet Zuck and co seek out opportunities and threats and do whatever it’d take: buy, burn or copy to win the war.
It is war and the last one standing is a business: positive cashflow. Look at the cash businesses like Apple, Microsoft and Facebook spit out.
Remember that Snap on Inc, the one my 12 year old niece would call boooring? Operating profit is 23% and net income is 15% with the stock up 150% in the last 5 years and a 1.82% dividend yield. If you had $3,000 to start investing and the Snap Inc IPO was the catalyst putting $1,500 to “SNAP” and $1,500 to “SNA” would have given you a taste of the markets, parked some money in a proven business, earned more than from your bank and familiarized yourself with the ever exciting stock market.
Whatever happens to Snap Inc and snap the stock we are all that much better since we get to welcome new investors, get to learn a few things and an old uncle gets a chance to ramble about.
Disclaimer: This post expresses my personal opinions for informational purpose and is not in any way meant to endorse or offer financial or securities advice. For that please consult your financial professional
