This guest commentary was written by our friend Joseph Calhoun from Alhambra Investment Partners
Snapchat, a company that describes itself as a camera company yet makes no cameras, went public last week at a valuation of $24 billion. The company is growing fast, revenue up from $58 million to $405 million in just the last year. And as one publication put it, the company “earned” a loss of $514.6 million in the process. The company, in its SEC filing added:
"We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability."
Now, that’s boilerplate, butt covering language to warn anyone who might read the prospectus that they are buying into a speculative venture. Not that anyone actually reads prospectuses but they were certainly given the opportunity. Maybe it means something, maybe not. But nobody can claim in the future that they weren’t warned.
Caveat emptor.
I don’t know if Snapchat will ever make any money. I’m not sure why they insist on calling themselves a camera company when their main business appears to be hosting short videos (or photos) that people send back and forth to each other. These videos are generally short (seconds not minutes) and disappear after a short time.
The company does sell glasses – which it cutely calls spectacles – that allow you to record videos, sync and upload them to Snapchat. No, I don’t know why anyone would want to wear these ugly glasses. And no, I have no idea why anyone would want to record short videos that disappear. Well, actually I do. Snapchat was founded by three frat brothers as a sexting app. Which explains the disappearing act.
I won’t be buying Snapchat stock for our clients...
Not because I don’t understand it or “get it” but rather because the idea of paying 60 times (80 times after day one of trading) revenue for a money losing company makes me more than a little nauseous. It is a pure speculation as the prospectus warns and you need to understand that if you are going to buy the stock.
The chances of you ever collecting a dividend from profits is darn slim in my estimation so you will have to find a greater foo….um…investor to take it off your hands at a higher price if you are to profit from your speculation. Probably not a hard find in a market as hot as this one.
Another useless, time wasting social media stock might offer a template. Twitter came public at $26 and peaked at nearly $75 a couple of months later. Now trading less than its IPO price, Twitter is still out there trying to make a buck. It hasn’t pulled that off in 10 years of trying but with a current market cap of $11 billion, hope obviously springs eternal. With the cash banked from the IPO, Snap, like Twitter, isn’t in any danger of running out of money anytime soon so the stock will be around but at what price? At some point they are going to have to figure out how to make money. And I see no evidence they have a clue how to do so.
Unlike another “camera” company that recently went public – GoPro (which I derided at the time of its IPO as a “camera on a stick”) – Snapchat has filed numerous patents – 46 in all I believe. But filing patents isn’t the same thing as enforcing them and we are talking about Silicon Valley here; patents are often nothing more than a coding problem. Instagram has already copied Snap pretty blatantly and Snap hasn’t lifted a finger to sue. Probably because they know they won’t win. Snap itself is the subject of a handful of patent and trademark infringement suits.
And a Silicon Valley IPO wouldn’t be complete without the founders suing each other. One of the frat brothers sued the other two when they tried to cut him out of the deal. The settlement cost the company about $150 million. Chump change when you come public at $25 billion but probably says something about the maturity of the boys running the company.
Snapchat is just the latest but there is a long list of these so-called unicorns, money losing companies with billion dollar plus private valuations waiting in the IPO line to cash out early investors. This happens in every business cycle; the closer you are to the end, the junkier the offerings get.
Snapchat may not be as junky as it gets but it is representative of the prevailing sentiment in business and markets. No matter how you view Snapchat as a company or an investment, its very successful IPO certainly shows that investors’ animal spirits are alive and well. Given the valuation placed on this serial money loser one can’t help but wonder if peyote might have been involved in the conjuring of said spirits but it is obvious that “investors” are willing and able to take big risks.
The Snap IPO may also offer a broader perspective on markets and our economy.
We don’t get the Snap IPO – not at this kind of valuation and maybe not at all – except in times of exuberance. Not just market exuberance, which we have in abundance now, but also exuberance about the future more generally.
Expectations regarding future growth have taken a turn upward – a drastic turn upward – since the election of Donald Trump as President. All surveys, from consumer to small business to big business, reflect this change in attitude, this new “national pride..sweeping across our nation” as Trump put it in his speech to Congress the other night. And confidence and optimism about future economic growth can have an actual impact on future economic growth, a self-fulfilling prophecy of a sort.
But optimism alone isn’t sufficient; it needs to be an informed optimism, one based on something more than hope and rhetoric. If we learned nothing else from the Obama administration it should be that hope isn’t sufficient to effect true, lasting change. The change in attitude we’re experiencing since the election has not a dollop of disbelief, of doubt, nor a soupcon of skepticism, just a blind optimism based on nothing more than talk.
The founders of Snap were not only able to sell stock to the public at a ridiculous price, they were also able to maintain complete voting control over their company by selling a non-voting class of stock. If you now own this stock you have just placed your hard earned dollars in the care of a couple of 20 somethings who just cashed in stock worth $250 million each.
And they retained stock now worth roughly $3.5 billion each. Evan Spiegel, the CEO, was paid $2.4 million last year which included almost $900,000 for security. I have no idea why this kid needs that kind of security detail but for some reason Entourage just went through my head.
Now that he’s cashed in Spiegel has dropped his salary to $1 but I’d be shocked if the “security” costs go down now. These kids are living a dream, the easy money life and it must seem so simple. Just get together with your frat bros and make an app, get rich and live large. $900,000 in security large. You think they are concerned about when Snap might make a profit? Anyone who bought this stock post-IPO has to have faith that these young guys – you know, the ones who wanted to create a sexting app that would keep them out of trouble – will figure it out like Zuckerberg did at Facebook.
Or they’re hovering over the sell button waiting for Snap to be followed by Crackle and Pop. Either way, buyers of the stock are looking for the same thing the founders already found – easy money.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Joseph Calhoun, CEO of Alhambra Investment Partners. Prior to founding Alhamra Investment Management in 2006, Calhoun was a Director of Investments at Oppenheimer & Co. and before that proudly served in the U.S. Navy’s nuclear submarine service for 8 years (1983-1990). This piece does not necessarily reflect the opinion of Hedgeye.
