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Snap Hits A Cold Snap

By Linda McDonough on May 17, 2017

Snap, the newly born IPO, cratered last week on the heels of its first-quarter earnings report as a public company. The stock, which was priced at $17 and hit a high of $27 the day after the IPO, fell 23% to $17.60 after a putrid quarter.

The good news, and the only good news, is that the stock was able to keep its head above the $17 IPO price. With 200 million shares sold to investors at $17, the supply of selling shareholders would likely swamp the market if the shares dropped below that price.

An article highlighting the news that Soros Fund Management initiated a position in Snap gave me the impetus to give the stock a second look. Unfortunately, the metrics look pretty dismal, and with zero profits and few hard assets on which to value the company, it’s hard to get too bullish on the stock.

First, the Soros position is incredibly small in proportion to the assets under management. Soros filed a 13-F, a form required by the SEC for all funds with greater than $100 million of qualified assets, which details its holdings. Many people scour these filings to see what stocks the “smart money” is moving into or out of.

Although it’s certainly positive that Soros considers Snap a worthy investment, the 1.65 million share position is worth just $37M, less than a quarter of one percent of Soros’ assets. It’s possible Soros received an allocation of shares from the IPO and awarded the broker with an after market order.

As far as the fundamentals go, Snap just snapped its winning streak. Revenue growth, daily active user counts and revenue per user all moved in the wrong direction. Most shockingly, Snap missed Wall Street analysts expectations, a highly unusual event for a public company’s first reported quarter.

There is no non-public information shared between a soon to be public company and its bankers. However, the group spends an inordinate amount of time together preparing for investor presentations and crisscrossing the country meeting with fund managers on the IPO roadshow. During that time the underwriting analysts learn an enormous amount about the company’s business plan and prospects.

Also, analysts usually attempt to start with conservative assumptions for the company’s first reported earnings. It’s always best for an IPO to make a great first impression by under-promising and over-delivering.

Snap failed to deliver. Revenue for its March quarter equaled $149 million, less than the $158 million estimate and down $16 million from the prior quarter. Daily active users were 166 million. The company added 8 million new users in the quarter versus last year’s first quarter when it added 15 million. Revenue per daily active user dropped 13% from the prior quarter, the first decline in the nine publically available quarters.

In working through Snap’s numbers, the deceleration in growth started in the December quarter, the first one where it added fewer active users than the same quarter one year ago. It’s certainly not comforting to note that this marked falloff coincided with Instagram’s successful launch of Instagram Stories, a service that mimics Snap Chat.

When asked about the slowing of active user growth on its conference call, CEO Evan Spiegel offered this obtuse explanation,

“And so, I think the most important thing to understand is that really we think of this daily active user growth as a function or a derivative of the growth in creation. And so we’re really excited about the momentum there.”

I’m not sure what “growth in creation” means. I do know that advertisers, who are Snap’s customers, are probably not asking for metrics related to “growth in creation.” I don’t discount that Snap has created an engaging and unique service but would stay away from the stock until the business metrics improve.

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