The Snap Inc (NYSE:SNAP) IPO finally debuted this week to a strong start. Snap started off at $17, then quickly jumped up to $24 and closed at $24.48 on its first day which represents a 44 percent jump in value.
Those who managed to get in the ground floor can feel pretty proud of themselves for now, as they have managed to take advantage of a constant drive for returns which has fueled this IPO. Snap waited until the right time, and its success so far indicates that investors are finally interested in IPOs after an anemic 2016. This portends good things for the market and the economy as a whole.
But while Snap is smiling for now, hopes that it could be the next Facebook (NASDAQ:FB) and surge over the long term are badly misguided. A good first day should not distract investors from the fundamental problems which surround this company such as intense competition and questions about its potential revenue growth.
Snap could go higher in the short term as investors chase returns and the hype builds. But over the long term, the odds are that it will be the next GoPro Inc (NASDAQ:GPRO) or Twitter Inc (NYSE:TWTR), two other tech companies which started off hot but today are a shadow of their past glory.
Innovation – but for What Purpose?
There is a reason why so many analysts have used Twitter as a warning sign in regards to talking about Snap. Twitter today is a company which is unprofitable, is seeing its user growth rate decline as people flock to other social media websites like Snapchat, and has no real plan to establish profitability.
A look at Snap’s SEC filing indicates that at least the first two parts of this comparison are true. Snap had net losses of $372 million in 2015 and $514 million in 2016 and saw its user growth rate slow in the second half of 2016. Snap wants to claim that this slower growth rate is because users had problems accessing the app on Android and that it will be soon resolved. However, the specter of competition from Instagram represents a severe threat to Snap’s prospects.
Snap’s defenders claim that it is different from Twitter because while Twitter today is largely the same as it was five years ago, Snap is not afraid of innovation. The development of the Snap Spectacles as well as its forays into VR technology indicate that Snap is interested in moving ahead, and it is possible that this sort of research could bear fruit.
But innovation for innovation’s sake is meaningless. The Snap Spectacles are certainly more marketable compared to the ridiculous-looking Google Glass. But while Snap may play at being a “camera company”, it will live and die with Snapchat’s advertising revenue. While being the social media website for current teens and millennials is appealing from an advertising perspective, will Snap be able to retain that loyalty if it racks up the advertising pressure? And will it actually be able to expand its user base to compete with the social media giants?
These are serious problems which Snap still does not have a good answer for, which makes it a highly risky investment over the long term.
The Corporate Governance Precedent
In addition to the problems surrounding Snap, investors should be highly concerned about Snap’s decision to make all shares non-voting. While tech companies like Facebook have sold shares which have extremely limited voting rights, Snap has taken it a step further and completely eliminated voting rights.
There are two reasons this should worry investors, though only one reason has to do with Snap. While Snap’s decision may not be that different from Facebook, Facebook and other tech companies have taken great pains to ensure that veteran businessman can give Zuckerberg advice to keep him in check. Snap CEO Evan Spiegel does not, which means that investors are betting that the 26-year old can keep Snap sailing and be willing to change course when times get hard.
But the bigger problem is if Snap continues to be successful. Will other companies look at Snap’s success and conclude that they can get away with only offering non-voting shares? Shareholder activism can sometimes be necessary to give a stagnant company a jolt, and Snap seems to be attempting to prevent any such jolt from occurring in the first place.
Stay Away
If you are reading this article and managed to pick up some Snap while it was still $17, congratulations. But sell it within a week at most.
Snap is trading high because it is a highly visible, large company which everyone has been talking about ad nauseam. But there are fundamental problems which surround this company, and the lack of a voting structure means that investors should be concerned about the leadership’s ability to turn this around.
Snap should continue to do well thanks to the hype. But do not mistake hype with reality, and do not confuse Snap’s current boom with the belief that it will be fine over the long run.