Snapchat went public in early March priced at $17 per share before shooting up 44% on its first day of trading up to a market capitalization value of $25 billion. This is great news for private investors who most recently valued the company at roughly $18 billion. As of May 12, 2017 after releasing earnings and dropping nearly 25% Snapchat is back at value of around $17.6 billion. While no one thinks this is indicative of tech IPOs in general because Snapchat is such a unique product, I believe Snapchat is going to continue on its decline.
The obvious reason for this decline is Facebook, who finally figured out the best medium to poach Snapchat’s concept, which was through Instagram. Facebook had tried to copy Snapchat back in 2013 with a separate application expanding on their “poke” concept. At the time Evan Spiegel said “it’s certainly scary when a giant enters your space… We now talk about it as the greatest Christmas present we ever had”. The problem with Facebooks release of poke was that it required people to download a completely new application since it wasn’t integrated into Facebook. This time it seems that Facebook learned from their mistake and utilized all of their platforms with pre-existing members to include Stories including WhatsApp, Facebook, Messenger and Instagram.
Below I will go into the reasons why I think Snapchat is on a downward path which it will never come back from.
- Instgram hits 200 million users, surpassing Snapchat. Now that Instagram has a lead, it will definitely not be passed up.
- 80% of Instagram’s users are outside the U.S. Instagram has boxed Snapchat in because they won’t be able to expand internationally when they already have a stronger presence. Snapchat’s only hope is growing users in the U.S.
- Snapchat does have a strong hold on Generation Z as users, but with a limited number of people to start using the application because of saturation they will not be able to grow.
- Digging into Snapchat’s financials one of their most significant costs is AWS, which outpaces their revenue alone. This is concerning because as Snapchat grows their AWS expenses will grow, so Snap will need to figure out how to produce more revenue per user.
- Millennials have gravitated toward Instagram stories because people simply get more views than on Snapchat. I have over 1,000 Instagram followers and about 300 Snapchat friends, so my stories get significantly more exposure on Instagram. This problem is nearly unsolvable because adding a Snapchat friend requires the person’s cell phone number or getting their username, which no one ever does.
The last thing I will say is that it was brilliant of Snap to go public before all the value was lost in the private markets. Equally brilliant I believe was Facebook’s roll-out of their clones because they were able to ride the news cycle of Snapchat’s IPO to market to people this product.
Spotify is planning a direct listing of its shares rather than a traditional IPO. What does this mean you ask?
Typically when a company IPOs it issues a new batch of shares to be sold to the public. Leading up to this issuing and sale the company goes on a roadshow for marketing purposes to get people interested in buying at the IPO. Meeting are set with bulk buyers to try and convince them how great the company is so that the IPO can price at the highest level possible.
For a direct listing there are no new shares issued, but a select amount of private shares are simply made available to the public. Existing shareholders won’t have the opportunity to pre-sell shares before the company goes public. Although this may sound unfair, the shareholders will not be constrained by lock-up periods or have their shares diluted. This all effects the price because it is based on supply and demand rather than a number arrived at through weeks of investment banking analysts lives.
The fact that the price will be arrived at by supply and demand means that the actual price will be left almost entirely up to chance. Different institutions will run their models using their assumptions, but this will likely result in a lot of volatility for the first few days. While many companies would be frightened by this chance – it is inspiring seeing Spotify go for it. Anecdotelly, when Facebook went public at $38 per share the price had a bumpy day of ups and downs; so much so that if it wasn’t for the syndicate bankers persistently selling shares at $38 throughout the day then the price would have likely dropped. The last thing that any company or banker wants is the public perception of a drop on their first day – which I personally don’t believe is a big deal, but apparently it is to many.
An additional risk becomes who the eventual buyers of the stock will be because it is immediately open to the public. For a traditional IPO – mutual funds, pensions and institutional buyers get first dibs because they help to dampen volatility. Since Spotify is doing a direct listing any short-term buyers can try to make a quick buck and create more volatility in the market.
Direct listings are rare, but it may make sense if a company wants to avoid paying fees to an investment bank. The company will also not have to leave any money on the table because investment banks tend to price an offering slightly below its true value so that the IPO is met positively. In addition this is a much faster process then a traditional IPO because the roadshow is avoided and there is no need for going through the share issuance process. This likely plays a factor because Spotify issued convertible debt to TPG and Dargoneer Investment Group. The interest rate on the bond increases by 1% for every six months that Spotify does not go public.
Thankfully Spotify seems to be doing well even in the face of its many competitors, namely the most recent entrant in Apple Music. The company recently released a series of billboards, which were hysterical and very well received around the world. Spotify also inked a deal with Universal Music Group in April 2017 for a multiyear licensing agreement of content. This agreement includes a clause that will delay Spotify freemium users from listening to certain albums for the first couple weeks of their release. Capital One also teamed up with Spotify to provide discounted rates for card members and in unrelated news Spotify has expanded their $5 student memberships globally (which I still use today).
In conclusion, I really like the creativity of Spotify here and their out of the box approach to listing on an exchange. As a Spotify user I hope the company has a successful IPO and does well on the public markets.
The reason these stories are worth noticing is because of what they represent on a broader level than their specific situations. Facebook’s ability to clone Spotify some people are saying is a flex of their power as a digital monopoly on social media. Spotify’s creativity in their public offering some people are saying is to avoid justification of it’s most recent valuation.
I believe when looking at stories like these it is so easy to get caught up on the details of the specific situation and ignore the broader picture. I hope this post encourages you to look at stories from both a micro and macro view.