To fully understand the Snapchat (NYSE:SNAP) IPO, you have to understand what Snapchat is and how it works. In the March 13, 2017 issue of Time Magazine, Joel Stein wrote an article titled "Snapchat Faces the Public." In the article, Stein perfectly describes the situation by saying, "Snapchat indeed has a monetization problem: How do you sell ads if you're essentially a phone company that has chosen to provide free calls forever?" Opposed to Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), Snapchat offers users an opportunity to take a picture or video, add some text or filters, and send it to another person, or a group of people. The "Snap" can be seen for no more than 10 seconds, and then it's gone. This could possibly be the reason Evan Spiegel is not branding Snapchat as a social media company. You can't share a snap, retweet it, or like it. As the father of teenagers, I get how it works, but it's not my thing. Snapchat users talk about having a streak with a friend, which means they have communicated with each other daily for a period of time. My son has a streak that's more than 500 days. So, you could essentially do the same thing with text messages, but the messages wouldn't disappear. Since social media posts tend to follow you around, even after they've been deleted, Snapchat offers a way to avoid that particular situation.
As I mentioned in my previous article, I don't agree with SNAP's valuation. I'm not an analyst, but I've been around the market a while. I can't see where a company that lost $515 million last year on $405 million in revenues is worth $24 billion. I also don't like the fact that there is no clear model for monetization. Snapchat offers what it calls "3V ads," letting brands take over consumers' smartphone screens with video promos. If you use Snapchat, you'll notice a Discover section with a bunch of videos from Fortune 500 companies. I'm not sure what kind of return advertisers are getting on their advertising dollars, but you aren't forced to see the ads to use the app, like you are on Facebook (FB) and Twitter (TWTR). The main reason I'm not a SNAP shareholder is the sale of non-voting shares of stock to the public. U.S. financial markets are the best in the world and offer some of the strictest corporate governance. One share - one vote is the best way for shareholders to level the playing field and have a say in how their company is ran. According to SNAP's prospectus, shares owned by co-founders Evan Spiegel and Bobby Murphy have voting rights nine months after they die. It's not like I'm ever going to own enough stock in a $36 billion market cap company to have an impact on the management, but non-voting shares go against the reasons I invest in the market in the first place.
According to a June 22, 2016 article in the Wall Street Journal, a Nielsen study commissioned by SNAP showed Snapchat reaches 41% of all 18- to 34-year-olds in the U.S. daily. The number could be higher over the last nine months, but I haven't been able to find any more current numbers. The idea behind Snapchat is that conversations with our friends are private and probably much less meaningful than those we have with our boss, or anyone else who might judge our level of responsibility. I'm 52 years old and I still prefer to have most of my meaningless conversations with friends in person, but I'm not in Snapchat's demographic. Even though close to half of the 18-34 age group Snaps every day, only 25% of all internet users use Snapchat. Comparatively, 70% of all internet users use Facebook. If you recall, Facebook bought Instagram for $1 billion, which was an unprecedented sum at the time. The acquisition was valued on users and not the traditional revenues and earnings model. When I was in the car with my teenagers one day, I heard them talking about people's Finsta accounts. Always on the lookout for a good stock tip, I inquired about what social media company Finsta is. They both had a good laugh and I learned a Finsta account is a Fake Instagram account, which most young folks have. Their friends and acquaintances know about it, but the Dean of Admissions to the college they plan to apply to does not. Facebook has had a couple of forays into Snapchat's space, but nothing ever really had any great success, until last summer. Instagram, which is owned by Facebook, announced a Stories section. According to a June 30, 2017 article in TechCrunch, about one-third of Instagram's 400 million users are posting on Stories every day, so Snapchat is not the only game in town. If you're like me, you don't believe anything anyone says in the stock market and do your own research. I found this interesting article on diskover.com discussing declining trends in Snapchat usage from a more grass roots level. The article basically says Instagram Stories is providing real competition for Snapchat. The big reason being America's love affair with celebrities. A decline in users, coupled with no real way to monetize advertiser dollars, could be a recipe for disaster, which means I'm all over the short side of SNAP. Now that SNAP is public, we'll be able to get a better idea of what they're doing by reviewing their quarterly and annual filings.
People ask if I'm going to short SNAP and if I think it will go higher. I'm definitely not shorting the stock, even though I believe the fundamentals dictate doing so. Stephen Isaacs, chairman of the investment committee at Alvine Capital, said in a March 2, 2017 interview with CNBC "Morgan Stanley and Goldman should hang their heads in shame here. I mean not about the valuation but non-voting shares?" I couldn't agree more, but there is no way I'm placing a bet on the short side against Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). Goldman was named syndicate trading manager, also known as the stabilization agent, for the early trades on SNAP. So, Goldman set the price and managed the greenshoe, or the additional shares allotted to underwriters. According to Bloomberg data, Credit Suisse Group AG was the lead underwriter on Alibaba Group Holding Ltd. (NYSE:BABA) in 2014, when Alibaba raised $25 billion on their IPO. Goldman Sachs was awarded the same role on the Alibaba deal, as well as Twitter in 2013. I learned long ago not to get in the way of a moving train. Does that mean I won't short it? Absolutely not! However, if I do short SNAP, I'll wait for some of the hysteria around the IPO to die down before doing so. That's not to say the stock couldn't take off like a rocket from here and I won't be on board the train. It's happened before and it will happen again. If you're trading SNAP and making money, more power to you. I'm still sidelined until I see which direction the trend is heading.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.