Snap IPO and asymmetry of information
Snap’s IPO, which tinted the NYSE and the news bulletins bright yellow on March 2, appears to be a classic case of informational asymmetry: after a blistering start, which put the company 44% above its share price, began its third day on a strong downward trajectory which, at the time of writing, continued heading south, robbing many ordinary investors of any profit.
What leads a share price to rise like champagne fizz on its opening day, only to fall within three days way below its launch price? The price of $17 a share allowed Snap to raise $3.4 billion and earn a valuation of $24 billion, which then rose to $34 billion at the close of the first two days, outperforming companies like American Airlines, United Continental, Hilton, Viacom , Hershey, Seagate, Best Buy, Ferrari or Twitter. How to make sense that?
What is Snap anyway? In addition to the highly successful Snapchat, a social network about which we have written reams, and that is not only highly popular among younger people, but seems to be slowly spreading to other groups as it sets today’s communication trends, it surprisingly defines itself as “a camera company”, although its only product is a pair of smart glasses with a built-in video camera known as Spectacles, and have only been available, and in extremely limited form, since November 2016, less than four months ago.
Since its launch, the company has played a teaser strategy that included directions on its page to the location where it would leave a yellow minion-like vending machine where glasses could be obtained for $130 while stocks last. Since February 20, the glasses have been available on the company’s website and from the United States, and although it has not given any official figures, they seem to be proving a reasonable success. In my experience of a week with them at home, and bearing in mind that that my Snapchat profile is somewhat inactive, I struggled to find any use for them, despite acknowledging that technically they are very well designed and that, in addition, solve once and for all the debate between in horizontal or vertical video. But in relation to the product that has come to define the company, ephemeral messaging … this latest addition has little to say.
For Snap, the name change and launch of Spectacles, along with rumors about 360° cameras or even drones seems to be a way of telling the market “we are more, much more than just ephemeral messaging,” which, by the way, is being imitated by pretty much everyone around. But from what has been seen so far, it has also been a way of making its stock an object of desire, a kind of yellow El Dorado that promised a replay of the more successful IPOs of recent times. The big question: whether the Snapchat IPO was more like successful Facebook’s or defenestrated Twitter’s, leaves room for only one answer when looking at the fundamentals: the company is growing at a similar rate to that of Facebook in the year before its flotation, but based on a much smaller user base (about three times less), and also, it has never made money … in 2016 alone it lost more than half a billion dollars. Whichever way you look at it, the Snap IPO is more a set of hopes and expectations about the future potential of the company than a palpable reality.
Having said that, the company has done many things well. It is adored by young people, thanks in part to its reputation for being incomprehensible to adults, but nevertheless exerts a certain fascination over them based on curiosity about knowing what our children are up to, along the lines of Peter Pan or “look how modern I am”. Its orientation to hardware could be promising if it manages to become an indispensable object for the fashion-conscious… but as the saying goes, hardware is hard, and there is still much to prove and important obstacles to overcome. For example, what will the company do if its glasses are unable to compete with the myriad of cheap imitations that will emerge around them? At the moment, the fact that there are no clones or known imitations is only a reflection that the product has not yet impacted any market in a minimally significant way.
So what to make of Snap’s IPO? To me, it’s a clever way to squeeze as much out of the market as possible so as to allow institutional investors, VCs, founders, and a few hustlers to maximize their profits at the expense of a large majority who never had access to shares at the initial valuation (no “ordinary” investor had access to that price of $17 a share, which was reserved for large institutional investors or extremely wealthy individuals able to obtain such access through their investment bankers) and who will be divided among those that reaped some profits in the first two days, and the smurfs that bought at an already expensive price, and that they will have seen the value of their shares fall from the third day on. Some people took a punt, and others used their gray matter… and had access to much more information. Some investors were dazzled by a success story and trusted that as happened with Facebook, their shares would increase in value in the medium term and make them a lot of money, instead of taking a nose dive like Twitter. For the moment, there is no way to say which way this will go. All we’ve seen is proof that Evan Spiegel is a very smart guy who has played his cards very well. Only time will tell.
(En español, aquí)
