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| Did Snap decide to go public too quickly? Are its bankers and board regretful, after share-price declines and a recent large loss? |
Snap shared a past with these and other big tech giants in that they were started by twenty-something wonders, brought fascinating products and service to the market, struggled with early losses, struggled in early days to get the business bustling, and managed the demands of venture capitalists.
Snap made the decision last year to go public and "actualize" theoretical values of the company. In the process it would raise some cash to put on the balance sheet and decide how best to grow the company and face off against Facebook's Instagram. In doing so, bankers prayed this might spur momentum in a lackluster IPO market and might encourage Silicon Valley unicorns Uber and AirBnB to rush to market.
Just weeks later and just after reporting a blockbuster loss in its first reporting period after the IPO, Snap leaders and board members might be second-guessing themselves. In the recent quarter, it announced a $2.2 billion loss that sent its stock value in a downward swoon (25%) and caused many to wonder if it would have been better off to delay the offering. (If it had delayed, the loss would not have been publicly acknowledged. It would have, however, likely been the subject of speculation the company continues not to make money.)
The announcement of the loss caused its stock price to sink from $23/share to $18/share in a blink. At May 17, the stock was valued at $19/share. Unlike the mildly botched IPO offering at Facebook, when shares dropped partly because of share-distribution mechanics with Nasdaq, Snap's price decline reflects true market sentiments.
As a public company, it must disclose and explain the loss and then gear the market up for how it will perform in the next quarter. And the quarter after that. And on and on.
How is the loss explained? That it lost money is not news. Snap, the quarterly reports show, loses about $100-200 million every three months. This loss was ten times more than usual. The company explained most of the expenses in the recent quarter are one-time charges and promises the losses will settle back to usual levels. But will investors feel comfortable enough with such assertions to jump back into the stock? Some hedge funds, reports say, have short positions in the stock.
In the most recent quarter, the company reports over $1.4 billion in sales and administrative expenses and about $800 million in essential research-and-development expenses in its battle with Instagram and practically all other firms that generate revenues mostly from digital advertising. Most of these expenses were accrued, so the company didn't necessarily use up all the cash it received in the public offering. It still holds onto about $990 million in cash reserves and will collect another $160 million in the period to come from receivables.
Hence, the company is not yet desperately cash-strapped--at least not in the short term. It also has no debt and pays no dividend, which means it isn't under pressure to generate high levels of cash flow to meet demands from lenders, debt investors and shareholders. Shareholders, if they aren't already, will wonder about long-term prospects and growth. Will the losses ever transition into earnings, and how long can they tolerate that? Snap reminds investors earnings won't be positive anytime soon.
Wouldn't the company have been better off remaining private? (Is this the question for the moment its leaders and bankers have pondered?) Going public permitted it to raise cash and reward founders and employees. Going public also might have forced the company instill financial discipline and deliver a plan toward profitability to the public.
But going public forces it to explain lagging performance and rationalize to frustrated shareholders why they "aren't there yet" and devote more time to investor constituencies, less time to product strategy. It permits the flocks of equity analysts to scrutinize every line on the income statement and balance sheet and second-guess strategy, forecasts, financial condition and intrinsic market value. Every quarter, co-founders Spiegel & Murphy must delivery a public message about Snap operations--good or bad.
As a public company with no earnings expected for quarters (years?) to come, does it still have "value"? Expert tech investors will argue it does. Earnings and cash flow contribute to value, but so do accounts, views, usage and resident technology (which Snap has, although growth has slowed and the competition is strong). With all the recent bad news regarding performance and expected growth, the company's market value totals $24 billion--about 20 times the value of an old company like the retailer J.C. Penney.
It's a good bet Snap's loss, for the most part, encouraged AirBnB and Uber, private companies on everybody's watch list for the next big IPO, to hang back and remain private for a while.
Tracy Williams
See also:
CFN: Facebook's Stumbling IPO, 2012
CFN: Twitter Takes an IPO Turn, 2013
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