The Big Snapchat IPO Question: Will Investment Dollars Also Go Poof?

Tyler Durden's picture

Authored by Mark St.Cyr,

If your head is still spinning made possible by last weeks news cycle? Congratulations – you’re normal. Trying to keep up with any news, even just one element (e.g., business) has been a near task in futility. Politics (understandably) in one form or another is currently dominating everything, even business. So with that said, it could be argued why the most anticipated, hailed, saving grace for all that is “The Valley”, IPO to save the IPO world Snap™ (aka Snapchat™) filed its former “confidential” papers on Thursday. And the reaction? (insert crickets here)

Sure there has been the usual high-fiving chorus throughout the tech world, and in particular “The Valley” world. That’s to be expected. However, with that said, I want to offer up the following headline as possibly the reasoning behind so little fanfare. It comes from none other than Vanity Fair™ and ask if you have the same reaction as I did. Ready?

“Silicon Valley, Rejoice: Snapchat Files For Huge $3 Billion I.P.O.”

My initial thoughts?: Silicon Valley dreams of working for “stock options” and IPO riches meets its WTF moment into reality.

Why you ask? Hint: “rejoice”, “huge”, “$3 Billion.” equals “It’s different this time.” And not in a good way.

Let me phrase it this way: All this waiting, all the hype, all those “dreams” placed squarely on the shoulders of this forthcoming IPO – and all they get is a lousy $3 Billion and the CEO gets to keep (and wears) the “lousy T-shirt.” Yep: “rejoice” just seems a little out-of-place after that, doesn’t it?

Now $3 Billion is nothing to sneeze at. Especially if it’s “your” money that’s going to be the content for the counting. But this is Snapchat! You know, the supposed next Facebook™ (FB) if not FB killer.

Comparisons to other tech companies (e.g., Twitter™) brings a swift response from roadshow messaging, “We’re the next Facebook, Not The Next Twitter.” All I’ll say is investors better hope, pray, and give burnt offerings to help that insinuation along before the possibility the “burnt offerings” is their money up-in-smoke after the fact, just saying.

Again, here we have “the” most anticipated IPO to come down the pike in quite some time. Their shopping for this IPO has been done in near secrecy where “confidentiality” was the term used as to describe the process. Many thought since they waited till the “markets” once again were tractor-beamed into never-before-seen-in-history-highs that this IPO would be priced at the whisper number of $5 Billion reminiscent of FB’s. Especially given all that seems to be riding on this “unicorn’s” back.

Sorry, to be the bummer, but $3 Billion is closer both in math, and reality, to Twitter’s $1.8 IPO offer range, than it is to FB’s $5 Billion. And what may be even worse? Their filings seem to make that case even further.

In my opinion: This isn’t a good sign if you’re the supposed “David” in “The Valley’s” version of “Goliath” killers. Especially if you’re simultaneously held to be the IPO savior of tech. And there’s only one thing worse than “expectations” not being met, even if it is hopes, or dreamlike infused wishes.

What’s that you ask? Hint: When you state publicly that your business, a business that is looking to garner other people’s money who will someday be looking for a return on that investment read – they may never find that scenario ever possible.

Think I’m kidding? From their S-1 filing, page 19, in bold, italicized text. To wit:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

So, I’m going to ask you a question from a business standpoint: Why in the world would you include such a statement?

Some will argue this was just some boilerplate legal mumbo-jumbo that is constructed and stated in more differing ways than there are ants on the planet, and needs to be included somewhere within the fine print, where all this form of legalese gets inserted to be glossed over. And that would be a fair argument. However, if that’s the reasoning: Why in the world would you make this statement front, center, and unable to miss?

Unless?

(I’ll just pause here, and let you fill in that thought you just had on your own. Remember, “investors” at these levels are supposed to be “sophisticated”, as in, they inherently understand potential losses. So why the need to make it so uncharacteristically prominent? Think that line over a few times, and try to square-that-circle on your own.)

From my perspective this not only appears troubling at first-blush, it get’s even further problematic as the cloud of “confidentiality” gets lifted further into the light of true business fundamentals. Why do I say such a thing? Again, from their own filings, page 36, and, once again, in bold and italicized, to wit:

“To our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange.”

Translation? If you don’t like what we’re doing with your investment dollars and assumed because you gave us your money we needed to listen to you? Screw you – it was right there in the S-1. Cha-ching!

The more I perused this S-1, the more I found myself thinking this seems to be nothing more than a legalesed filled document to do nothing more than solidify a founders cash-out with no chance of recourse. Or said differently: Screw what ever befalls the company and investors later. i.e., The “I’ve got mine – who cares about yours.” type of mentality that seems to plague much of what is commonly known as “tech” or “The Valley” stylized entity.

As always: Don’t take my word, or conclusions for it. Read the document for yourself, and come to your own conclusions. Especially if you are one of those just “chomping at the bit” as to be the first to ride this long-awaited unicorn. For there are warning signs throughout this document that anyone with a modem of business acumen will find troubling.

I’m sorry, did I hear you say, “It can’t be any worse than what the above portends?” Fair enough, so here’s another detail contained within page 4, once again, to wit:

Revenue increased to $404.5 million compared to $58.7 the year before.

Sounds great, right? Yep, until you also read they incurred a net loss of $514.6 million up from $372.9 million in the same period. Translation? More users – more losses. See above statements for what that may translate to “your” returns on investment hopes. And try not to think about the old “We sell dollar bills at 98 cents – but we make it up on volume!” joke as you try to evaluate what this business model should be worth, or better yet, how anyone could ever value it at $25 Billion or more. Only in “The Valley” is all I’ll say.

I’ll just end with this one statement, or observation:

Remember when making profits was seen as “just not getting tech” and you were relegated to “doesn’t have a clue” status if you dared to ask questions such as “profitability”, “net profits”, “return on investment”, and more? You know, when The Fed. was pumping in all that QE money? What’s happened since then?

Hint: A dried up IPO market, IPO’s that are still “in transition” that may never see light of day, IPO’s that were supposedly “the” new markets for their relative products are now seen as investment disasters. i.e., Look to TWTR, FIT, GPRO, TWLO, P,  and others for clues, always remembering how they too were “cutting edge” when it came to messaging, cameras, wearables, and more. Because today? Hint: look to any stock chart.

And yet, here we are (again) today with another “app” that takes pictures so that people can augment their pictures or message – then goes “poof.” Just like it’s cash-burn status. And we’re told – “it’s different this time” (again) when evaluating its business model and metrics.

Sure it is.

You know what truly is different this time? The inclusion of the term “poop” on a S-1 filing.

Oh yes – that’s not a misprint. It’s right there on page 110 as to give credence to the “ads for eyeballs” fallacy. You just can’t make up stuff like that. No one would believe it.

No wonder this was all done originally under the cloak of “confidentiality.” Now that it’s hit the light-of-day? “Poop” may indeed have been a good term to include, because from my perspective…

This whole thing stinks to high-business heaven. Where many an “investors” bank account may also find itself. i.e., “Money Heaven.”

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JarMyMetric's picture

Sense this article does nothing to further the agenda of President Bannon it has no place here @ ZeroFacts.

The_Dude's picture

Trolling for Soros is much more profitable than this Snapchat shit...

Chris Dakota's picture
Chris Dakota (not verified) The_Dude Feb 7, 2017 7:07 AM

chaos is coming to the markets, as soon as Friday.

pretty much the whole month.

DetectiveStern's picture

Snapchats USP is defeated by my phone's ability to screenshot. QED.

Chris Dakota's picture
Chris Dakota (not verified) DetectiveStern Feb 7, 2017 9:16 AM

I heard the really good thing about Snapchat is it deletes your texts, unable to ever recover them.

SoDamnMad's picture

"Homer, this Snapchat has such a nice name. I think we should mortgage the farm and use all the proceeds to buy up as many shares as we can afford."

"Edna, do you think that is really wise?"

"Oh Homer, what could go wrong?  Everyone is making so much money on all these good ideas coming from the smart people who work in Silicon Valley."

I Am Me's picture

"...we eat, sleep, and poop with our smartphones every day. "

 

Yep. It's in there.

 

More important info on page 155:

Founder Proxy Agreement

Mr. Spiegel and Mr. Murphy, our co-founders, have entered into a proxy agreement with each other, which will remain in effect after the closing of this offering. The agreement will apply to all shares of our Class B common stock and Class C common stock that each may beneficially own from time to time or have voting control over, which will represent approximately     % of the outstanding voting power of our capital stock immediately after the closing of this offering.

Under the proxy agreement, Mr. Spiegel has designated Mr. Murphy as his designated proxy holder, and Mr. Murphy has designated Mr. Spiegel as his designated proxy holder. Each co-founder has the right to select from time to time an alternate proxy holder who would exercise the proxy if the primary proxy holder were unable or unwilling to serve as a proxy. Mr. Spiegel and Mr. Murphy have each appointed Michael Lynton as his alternate proxy. Mr. Spiegel and Mr. Murphy may not change the primary proxy holder without the other’s consent. A proxy holder will have the right to exercise all of the voting and consent rights of our shares of Class B common stock and Class C common stock beneficially owned by the deceased or disabled co-founder or over which he has voting control on and for the nine months following the co-founder’s death or during his disability. Before any proxy holder may vote or act by written consent with respect to the shares of Class B common stock and Class C common stock over which they hold a proxy, that proxy holder will meet with the independent members of our board of directors within 90 days of the co-founder’s death or disability.

The proxy agreement will terminate as soon as any of the following occur: (i) nine months after the death of both Mr. Spiegel and Mr. Murphy; (ii) the liquidation, dissolution, or winding up of our business operations; (iii) the execution by us of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of our property and assets; or (iv) the date as of which Mr. Spiegel and Mr. Murphy terminate the proxy agreement by written consent of Mr. Spiegel and Mr. Murphy, with notice to us.

south40_dreams's picture

Do like FB and steal everyone's info and sell it.  Worked for them!

adonisdemilo's picture

Looks like a robbery in progress to me.

JoeTurner's picture

"Pets.com is the next generation e-commerce company destined to be worth trillions" - 1999

pachanguero's picture

Somebody call the cops...

Giant Meteor's picture

"We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability."

Meh, people getting a bit more brazen, in their bending over parties. Why folks can't just stay with tulip bulbs, is beyond me ... 

hotrod's picture

Snap Chat is real world.  You can say something and then deny you ever said it.

breaktwister's picture

Cool, can't wait to short this POS

RovingGrokster's picture

Wow - instant pictures of tulips!
I never had any time for tulips, and I don't have any time for snapchat, although after page 110, it may properly be called "CrapChat."

I've worked for two companies which went public, and am currently working for one which hopes to go public. In each case steadily growing revenue and at least two quarters of profitability were the prerequisites for successfully floating the IPO. Statements of "past performance is no guarantee of future profitability," etc., but never anything like "we're broke, we're bleeding, and we'll probably burn your money!"

Actually, aside from pets.com, there is a precedent for a money pit with enthusiastic buyers for its stock - Tesla Motors!

Iconoclast's picture

We're obviously old school dude, I still value companies at ten to twenty times their pre tax profit. Not these days bro. That's just so last century.

Ban KKiller's picture

Snowflakes love faith so this ipo should go to the moon right before the institutional investors dump it all. Gee, never saw that coming. 

What dot com bubble? Bear Stearns is solid and silicon valley accounting is honest, no, really. Ha ha ha. 

Fit bit fad phase three...

Stinkytofu's picture

i guess i'm unsophisticated, but what the hell does a snapchat produce?

just another "social media" fad?  is this some scam where the big money

is made by the institutional investors who get the IPO shares, and dump

them on the little retail guys a week later?

 

all smoke and mirrors with no underlying value?  in that case, seems a

great place to invest my bitcoins, another smoke and mirror tech thingy

with no underlying value.

UpAndComing's picture

I was at a birthday party this weekend where there was a good number of kids in their early teens. They were all staring at their phone ( nothing surprising there) and they were all looking at their snapchat. My little nephew is in his mid 20's. Most of his crew uses snapchat more than facebook. For those who don't know, snapchat is no longer just about getting her to send you pics of her privates...although no one cancelled that so if you got that going, no one will be mad at you. Snapchat is a timeline where you can see your friends post either pics or 10 second videos. Sounds like the perfect app for today's ADHD snowflakes. There are no political posts like facebook lately. Its direct and to the point. All the kids who have phones ( for some reason) 10 and up are on it. Millenials are on it more than facebook. For shits and giggles I watched a few videos about snapchat on youtube. There are people paying good money for seminars learning how to leverage snapchat to promote their business. One seminar i saw was put on by the former director of social media for Linkedin. The shit is pretty serious. Huge companies are running stories on snapchat and the social media marketing community is all over snapchat. It has the same potential for targeted advertising as facebook, and the number of users for snapchat is growing into hundreds of Millions. Different resources are reporting they are now over 100 million daily users. Based on the number of new added users daily, the number of businesses learning how to advertise on it and the business model similar to facebook...I would say its worth considering.

nati's picture

Thanks for the info. It's always good to hear it straight from one of the bookrunners.

Archive_file's picture

Exactly. This guys post is a plant.

UpAndComing's picture

Would be nice if I had a piece in it. Just casual observation...mostly public knowledge. You can search user stats and if you know any kids with smart phones, you'd observe them using the app. Then you can youtube key words like snap chat and marketing...see what you find. Always funny to hear people say "what do they actually produce". These are typically dinasours who have no fucking clue about the billions being made in data mining and targeted ads. You say words like click through ratio and conversion funnel and their eyes glaze over. Bottom line is...its a service where people volunteer ALL of their info usually just like facebook and companies can buy an option to target a segment within the total number of users to push their product. Marketing people are no longer thinking tv ads...they're thinking how do i pay to target just my buyer. Is there potential for money to be made there? Look at facebook's 5 year chart.

adr's picture

Millennials are worthless to advertise to. They are so fickle and jump fads so often that by the time you produce anything, they are already on to the next "it" product. ADHD through vaccines and GMOs turned an entire generation into basement dwelling lumps in skinny jeans.

There was a store in a local mall owned by a "Fashion Guru" who the millenials loved. Some rapper wore a pair of jeans to a concert and EVERYONE had to have those jeans. The guy happened to have 100 pair of those jeans on order and he sold out of them immediately. Kids were putting the jeans up on Ebay for $500. Thinking he had a goldmine the shop owner ordered 1000 pair.

By the time the jeans arrived the kids already moved on to another fad because the rapper's 2.5 seconds of fame were already up. The "Fashion Guru" was stuck with 1000 pair of jeans he couldn't sell for $20.

SnapChat is worthless. They will never make profit dollar one. Yet the "founders" will be worth billions. That is the new bullshit economy fueled by fake money from Mr. Yellen.

MCDirtMigger's picture

I'd just as soon invest in beer.

DontFollowMyAdviceImaDummy's picture

if Snapchat charged $1 to every girl to use their dog or deer filters they'd be worth more-than-Apple... but they're not smart enough to do that so they'll Twitter themselves

Iconoclast's picture

It loses 500ml a year, has no plan to monetise, but has lots of empty headed dullards using its free service, that's got to be worth 30b right? Why stop there? Ramp it up to 60b.

Iconoclast's picture

And uber lost 3bn last year. Kill me now, as I haven't got a fukcin clue how valuations are reached, or make me an economist, oh, wait...