Daily Management Review

2 reasons to stay away from Snap's IPO


Snap’s IPO looks as exciting as a new iPhone. However, investors should be careful and look closely to assessments, the business model and structure of the company.

S-1 reporting has finally been published. Now Snap can start to prepare for IPO. According to forecasts, the developer of popular app Snapchat could earn about $ 3 billion on its shares, reaching total capitalization of 25 billion.

In 2016, the company’s revenue was relatively small - 404 million dollars. Thus, expected capitalization of the company exceeds earnings more than 60 times. If it does not bother potential investors, here are a couple of reasons to stay away from this highly touted IPO. 

Income growth means nothing

Over the past two years, the company's revenue soared nearly eight times. Such growth encouraged investors, but, in fact, it is nothing special. This is associated with a number of users increased from 50 million in beginning of 2014 to present 150 million. Yet, there was absolutely no advertising back in 2014, and any ad-free app with tens of millions of active users will soar if you start to promote it. Anybody could achieve incredible revenue growth in such circumstances. The real problem is how to generate revenue sufficient to cover costs and make a profit, and not shoo users away with too intrusive advertising. Facebook has got it, and Twitter - not quite. In the six years, annual revenue of the latter jumped 90-fold from $ 28 million in 2010 to 2.53 billion in 2016. The costs, however, are comparable. As a result, the social network is consistently unprofitable, and its shares are getting cheaper. 

Snap’s revenue growth means nothing. Today, the company loses more money than Twitter in similar conditions before the IPO. Net loss of the social networks numbered $ 79 million in 2012, and revenue amounted to $ 316 million. In 2016, Snap, lost $ 514 million but earned just $ 404 million. In IV quarter, the figure increased by only 5 million, compared with 10 million in the III quarter. Of course, the performance still could be improved, yet it looks like the company is now approaching its limits.

Public in name only

The US history has no precedents of selling shares devoid of all voting rights during an IPO. Structure of share capital of other technology companies, for example, Facebook, is arranged in such a way that the founders have a majority of votes, not having a controlling interest. Snap refused this model. However, potential investors won’t be caring about this issue as long as the company will be growing and shares will be rising. The right to vote is not required when everything goes well. Problems arise when things do not go according to plan.

Snap warns future shareholders of the risks associated with such a structure: "concentrated control can delay, impede or prevent transfer of control in the hands of others, merger, consolidation or sale of all or part of the assets, despite support of these actions by the shareholders. On the other hand, concentrated power allows co-sponsors to make transactions challenged by other shareholders. In addition, co-founders will be able to make long-term strategic investment decisions and take risks that could cause serious harm to the company". Long-term goals are necessary for any business. However, complete freedom of action and lack of accountability to shareholders is a ticking time bomb. 

source: fool.com

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