WHEN Snap, the parent company of Snapchat, an app popular among teenagers for its disappearing messages, staged a public offering on March 2nd, Evan Spiegel, its 26-year-old boss, became a self-made billionaire. (Only John Collison of Stripe, an online payments startup, rivals him for such youthful tycoonery). Whether public-market investors will strike it rich remains to be seen. In its first day of trading Snap’s shares rose by 44%; they have since fallen by 16% from their peak, meaning around $5bn of market value vanished in days.
The volatility will probably continue. Optimists reckon that Snap’s market value could increase more than fourfold from around $26bn today as it adds users and advertisers. Very few large internet companies have gone public recently, which gives it tremendous scarcity value, says Roger Ehrenberg of IA Ventures, an early-stage investment firm.
But sceptics are growing in number. Every analyst who has started covering Snap’s stock has issued a negative rating. They question its high valuation and underline all the challenges. Snap’s growth has slowed in recent months. Its total addressable market is estimated to be 80% smaller than that of Facebook, a social network, and it already has 50% penetration among its potential user base in America, reckons Laura Martin of Needham, an investment bank.
Snap also has an unconventional structure that gives shareholders virtually no power. This week it emerged that a group of large institutional investors had lobbied stock-index providers such as MSCI not to include Snap in their benchmarks for that reason. That will not directly affect share-price performance yet, but being viewed as an outlier on corporate governance does not help.
Analysts have also drawn attention to Snap’s losses. These could well rise from $515m last year to a whopping $3.7bn in 2017, according to Pivotal Research Group, a research firm. And that does not include huge stock grants to employees. In 2016 Snap had stock-based compensation expenses of around $1.7bn, or roughly $1.4m per employee, compared with Facebook’s average of $230,000 and Google’s $144,000 per employee. These grants dilute investors.
Before the offering, hopes had been high that Snap would spark a wave of public offerings by tech startups. Even if its shares sink further, many of them could still choose to go public, especially enterprise-software firms, which sell IT tools to other businesses. Their revenues are more reliable than those of Snap. One software company, MuleSoft, is likely to go public next week. Such companies do not attract the relentless public scrutiny that Snap and other tech stars do. Increasingly, that looks enviable.