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So one of my hobbies is reading financial reports of corporations - for fun, seriously. I like figuring out how companies make money and whether they align with my predictions for said company. So late night attempting to fall asleep reading some financial websites and came across the Snapchat IPO situation. I started reading it and started chuckling, then it just got outlandish. Maybe one day I'll try one of these maneuvers.
Basically - None of the shares up for trading have voting rights. Now Google's founders still control a majority share of their company as well as Facebook, but none have gone so far as to do what SNAPCHAT has done with their initial offering. No Class A stock is allowed to vote. Class B stock have 1 vote, and Class C stock (which the two founders own the majority of), have 10 votes for each share.
At that point I started to think, okay well they gotta have some sort of justification for this:
... nope. You don't need to be a stock investor to look at the chart above, without even knowing what's going on to see something is off.
Now even if you have no voting rights as a shareholder, and maybe that valuation is way too high for an IPO, at least there are going to be dividends paid out right? Nope.
Investors are a bit livid about this, with one stating: "$snap can f*** right off with that voting structure."
and another stating: "shares disappear 30 seconds after you buy them."
There sort of is no actual end-benefit of buying them unless you are betting that their value will increase, and for the most part you cannot do anything even if the CEO decides to let things go to shit and go on vacation for the next 20 years. To even further the problem if investors aren't willing to buy them, then selling them will be equally as difficult when you do have them, meaning the price will be droven downward - unless they offer dividends.
And the final kicker, they are still unprofitable. I personally see their Spectacle product as a fade, but I could be wrong, I doubt it though. They have too keep the experience fun, and even I'm tired of all these photos of women as puppies, and whatever other nonsense there are. Maybe I've just gotten way too old for this, but I can't see those snapchat filters being around in 2 years, just like this meme is no longer around:
I have no problem betting on people having fun, the problem is things erode so fast on the internet that having to keep up is more difficult as you go into the "serious business" phase, and when you IPO, it's serious business.
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Snap also continues to struggle to make money -- and it signaled a profit may not be coming soon. The company suffered losses of $515 million in 2016, up from a loss of $373 million the year before.
"We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability," Snap said in the filing.
Not just that, but Snap acknowledged that "for all of our history, we have experienced net losses and negative cash flows."
[..]
"To me, Snap is Twitter 2.0 -- a company with a good growth rate that is losing a ton of cash, coupled with a massive valuation," said Brian Hamilton, cofounder of private company analysis firm Sageworks.
Snap's corporate structure will allow its founders to exert enormous control over the company. The Class A shares being offered in the IPO have no voting rights, meaning they can't weigh in on key matters like who sits on the board, how much executives are paid and on potential mergers.
Founders Evan Spiegel and Robert Murphy will control much of Snap's Class C shares, which are granted 10 votes apiece. Class B shares will have one vote apiece, but it's not clear who holds those and they're not being offered in the IPO.
[..]
As is common, Snap listed a number of risk factors that could hurt the company's growth. One interesting risk: Snap warned that its lack of a designated headquarters may "negatively affect employee morale." Snap is based in Venice, California, but its offices are spread throughout the city, a setup the company said may limit social interaction and oversight of employees.
The company confidentially filed paperwork for an IPO before the presidential election. It took advantage of the Jumpstart Our Business Startups, or JOBS Act, which allows companies with less than $1 billion of annual revenue to file for IPOs in secret.
Snap makes money from an eclectic mix of sources, ranging from traditional video ads and sponsored location-based filters to physical products like smart sunglasses sold out of smiling vending machines and ice trays sold on Amazon (AMZN, Tech30).
The Snapchat app launched in 2011 and set itself apart from other messaging services with a focus on disappearing messages. It initially developed a reputation as a service for sending salacious pictures, but has since moved far beyond that.
Today, Snap defines itself as a "camera company." It sells Spectacles for recording videos and has built up its flagship app with augmented reality lenses that make sharing posts with friends more playful and engaging.
Snapchat's success has forced larger tech services like Facebook (FB, Tech30), Twitter (TWTR, Tech30) and Instagram to clone its features, with mixed success. Facebook famously tried to acquire the company for $3 billion in 2013. The sum sounded outlandish at the time -- now, not so much.
The public offering will officially make Snap's cofounder and CEO Spiegel, 26, one of the world's youngest billionaires.
If the stock performs well, Snapchat's IPO could encourage other billion-dollar tech startups to go public. Many startups have preferred to sit on their vast piles of private funding rather than deal with public market scrutiny.
But Snapchat may also have to contend with comparisons to Twitter, which went public amid high expectations in 2013 only to crash and burn after its first earnings report.
Investors thought Twitter might be the next Facebook, with more than one billion users and tremendous demand from advertisers. Instead, Twitter's user base stalled around the 300 million mark.
The challenge for Snapchat, according to Monness, Crespi, Hardt analyst James Cakmak, will be getting investors to focus more on how much users actually "engage" with its services rather than just overall user growth.
"Since they've managed to successfully change the way advertisers think, investors should be an easier sell," Cakmak says, before adding a caveat: "So long as the growth curve remains steep."
Source: Snapchat files for $3 billion IPO
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I base these comments on a simple valuation model that focuses on sales rather than earnings. That’s crucial for startups, since most of them—like Snapchat—have yet to produce any profit by the time they go public. Price-to-earnings ratios therefore are useless for valuing them.
Price-to-sales ratios, in contrast, speak volumes.
Snapchat parent Snap Inc. SNAP, +0.00% , for example, will at IPO have a price-to-sales ratio (PSR) of 55.6, assuming it comes to market at the midpoint of the $20 to $25 billion range reported by The Wall Street Journal. That would be higher than any other major U.S. IPO in decades—and maybe ever. (I base this on data from Jay Ritter, a finance professor at the University of Florida and academia’s leading expert on the IPO market; included are all U.S. IPOs since 1980 that, when coming to market, had at least $200 million of sales in 2016 dollars.)
PSRs almost always decline as a company grows, however, and that’s the Achilles' heel of a high PSR. In order for its stock price to not fall along with its ratio, revenue must grow just as fast as the ratio falls.
How far does the typical company’s PSR fall over its first five years as a publicly traded company? Google’s GOOG, -0.08% GOOGL, -0.07% , for example, fell from 10.3 to 4.9; Facebook’s FB, -0.36% fell from 25.3 to 11.1. In fact, according to FactSet, the median internet company’s PSR on its fifth birthday was 2.8.
Regardless of which of these numbers we use, Snapchat’s sales will have to mushroom over the next five years. If we assume its ratio in five years will be equal to what Google (now Alphabet) had on its fifth birthday as a publicly traded company, Snapchat’s sales will have to grow more than 10-fold—just in order for its parent company’s stock price to stay even.
That works out to an annualized five-year revenue growth rate of 63% per year. To put that in context, consider that U.S. IPOs that came to market between 1996 and 2007 had average five-year revenue growth rates of 26% annualized. (This according to research conducted by Ritter and two colleagues.)
Of course, you wouldn’t bet on a company if you didn’t expect it to make money. So breaking even is nowhere good enough. That in effect means you have to bet that Snapchat’s sales will grow by even more than 10-fold over its first five years. A lot more.
For illustration’s sake, let’s assume that you require a 15% annualized profit in order to compensate you for the high risk of Snap stock (higher than the overall market’s historical rate of 10% annualized, in other words). If so, then its five-year revenue growth ratio will have to be 87% per year. In other words, the company will have to nearly double its revenue every year for five years in a row.
To put that in context, consider that Google’s five-year revenue growth rate after IPO was 57% annualized. Facebook’s was 47%.
To repeat, it’s not impossible for Snap to jump over these higher barriers. As Professor Ritter pointed out to me in an interview, in the “winner take all” internet economy, a successful company could very well live up to the growth expectations embedded in a high PSR.
Source: Opinion: The math Snapchat doesn’t want you to see
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When Snapchat's parent company filed for an initial public offering last week, investors got the first glimpse of just how richly valued Snap stock is likely to be, making the highly hyped debut likely the most expensive tech IPO in history. Snap Inc. is reportedly seeking a $25 billion valuation in its IPO, expected to happen in March.
Still, the deal-breaker for many investors is not Snap's valuation, but rather a peculiar feature of its corporate governance that is unprecedented among public companies: Snap shareholders will receive no voting rights when they buy shares in the IPO.
Snap acknowledged in its IPO filing that it would likely be the first company to sell non-voting stock in an IPO on a U.S. stock exchange. Google (googl, +0.27%) and Facebook (fb, +2.10%), whose founders also preserved significant control when they went public, created two classes of stock, with different voting rights, but did not go so far as Snap in depriving shareholders of any say in corporate matters whatsoever.
That novelty is making big-money investors balk at Snapchat. The head of corporate governance for CalPERS, one of 18 pension funds and institutional investors who sent a letter to Snap on Friday objecting to the lack of voting rights, described Snap's vote structure as "a banana republic-style approach," according to the Financial Times.
At the very least, it's the stock market version of taxation without representation, in which shareholders who buy in to Snap can only hope that its soon-to-be-billionaire 26-year-old CEO Evan Spiegel will do what's right by them, and increase the value of their stock. Spiegel and his co-founder Robert Murphy each hold more than 44% of the total voting power of Snap, together representing a super majority of nearly 89% of the votes. Here's what Snap's other shareholders therefore won't be able to do:
That last one is noteworthy because it highlights how Snapchat's owners are essentially building Snap as a fortress impervious to hedge fund activists. The non-voting stock structure means that shareholders who acquire more than 5% of the company are not required to file the usual 13D filings typical of when activist investors such as hedge fund manager Bill Ackman first buy into a company as part of a campaign to increase its value. Then again, such activists would likely have no interest in investing in Snap, given that the non-voting shares strip them of the tools that they would use to effect change, such as nominating their own candidates to the board.
As one macro hedge fund manager, who uses the Twitter handle @econhedge, tweeted (using an expletive we can't include in its entirety), "$snap can f*** right off with that voting structure."
Snap has rigged its governance structure such that even if the board did decide to fire Spiegel or his co-founder Robert Murphy, there would be little point in it: The executives would still retain all their voting power anyway, just as they would, for another nine months, even if they died. Shareholders generally value the ability to get rid of a CEO or replace directors as recourse in the event that management, say, refuses to entertain a takeover proposal or sell the company even when a buyer is interested in paying an attractive premium. Such disputes can lead to proxy fights, but Snap shareholders will have no such luck.
As Snap says in its IPO filing, its non-voting structure is "designed...to discourage certain tactics that may be used in proxy fights," but could also "have the effect of discouraging others from making tender offers for our shares." It also allows co-founders Spiegel and Murphy to further dilute other shareholders as they wish. What's worse, Snap has no intention of paying a dividend now or perhaps ever, according to its IPO filing, offering shareholders little consolation for staying silent for the duration of the ride.
Other shareholders' lack of control over the company that makes Snapchat, whose messages disappear after they are received, prompted hedge fund manager Mark Spiegel of Stanphyl Capital, no relation to Evan Spiegel, to quip on Twitter that Snap's "shares disappear 30 seconds after you buy them."
Source: Why Some Investors May Boycott Snapchat’s IPO
--
Basically - None of the shares up for trading have voting rights. Now Google's founders still control a majority share of their company as well as Facebook, but none have gone so far as to do what SNAPCHAT has done with their initial offering. No Class A stock is allowed to vote. Class B stock have 1 vote, and Class C stock (which the two founders own the majority of), have 10 votes for each share.
At that point I started to think, okay well they gotta have some sort of justification for this:
... nope. You don't need to be a stock investor to look at the chart above, without even knowing what's going on to see something is off.
Now even if you have no voting rights as a shareholder, and maybe that valuation is way too high for an IPO, at least there are going to be dividends paid out right? Nope.
Investors are a bit livid about this, with one stating: "$snap can f*** right off with that voting structure."
and another stating: "shares disappear 30 seconds after you buy them."
There sort of is no actual end-benefit of buying them unless you are betting that their value will increase, and for the most part you cannot do anything even if the CEO decides to let things go to shit and go on vacation for the next 20 years. To even further the problem if investors aren't willing to buy them, then selling them will be equally as difficult when you do have them, meaning the price will be droven downward - unless they offer dividends.
And the final kicker, they are still unprofitable. I personally see their Spectacle product as a fade, but I could be wrong, I doubt it though. They have too keep the experience fun, and even I'm tired of all these photos of women as puppies, and whatever other nonsense there are. Maybe I've just gotten way too old for this, but I can't see those snapchat filters being around in 2 years, just like this meme is no longer around:
I have no problem betting on people having fun, the problem is things erode so fast on the internet that having to keep up is more difficult as you go into the "serious business" phase, and when you IPO, it's serious business.
--
Snap also continues to struggle to make money -- and it signaled a profit may not be coming soon. The company suffered losses of $515 million in 2016, up from a loss of $373 million the year before.
"We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability," Snap said in the filing.
Not just that, but Snap acknowledged that "for all of our history, we have experienced net losses and negative cash flows."
[..]
"To me, Snap is Twitter 2.0 -- a company with a good growth rate that is losing a ton of cash, coupled with a massive valuation," said Brian Hamilton, cofounder of private company analysis firm Sageworks.
Snap's corporate structure will allow its founders to exert enormous control over the company. The Class A shares being offered in the IPO have no voting rights, meaning they can't weigh in on key matters like who sits on the board, how much executives are paid and on potential mergers.
Founders Evan Spiegel and Robert Murphy will control much of Snap's Class C shares, which are granted 10 votes apiece. Class B shares will have one vote apiece, but it's not clear who holds those and they're not being offered in the IPO.
[..]
As is common, Snap listed a number of risk factors that could hurt the company's growth. One interesting risk: Snap warned that its lack of a designated headquarters may "negatively affect employee morale." Snap is based in Venice, California, but its offices are spread throughout the city, a setup the company said may limit social interaction and oversight of employees.
The company confidentially filed paperwork for an IPO before the presidential election. It took advantage of the Jumpstart Our Business Startups, or JOBS Act, which allows companies with less than $1 billion of annual revenue to file for IPOs in secret.
Snap makes money from an eclectic mix of sources, ranging from traditional video ads and sponsored location-based filters to physical products like smart sunglasses sold out of smiling vending machines and ice trays sold on Amazon (AMZN, Tech30).
The Snapchat app launched in 2011 and set itself apart from other messaging services with a focus on disappearing messages. It initially developed a reputation as a service for sending salacious pictures, but has since moved far beyond that.
Today, Snap defines itself as a "camera company." It sells Spectacles for recording videos and has built up its flagship app with augmented reality lenses that make sharing posts with friends more playful and engaging.
Snapchat's success has forced larger tech services like Facebook (FB, Tech30), Twitter (TWTR, Tech30) and Instagram to clone its features, with mixed success. Facebook famously tried to acquire the company for $3 billion in 2013. The sum sounded outlandish at the time -- now, not so much.
The public offering will officially make Snap's cofounder and CEO Spiegel, 26, one of the world's youngest billionaires.
If the stock performs well, Snapchat's IPO could encourage other billion-dollar tech startups to go public. Many startups have preferred to sit on their vast piles of private funding rather than deal with public market scrutiny.
But Snapchat may also have to contend with comparisons to Twitter, which went public amid high expectations in 2013 only to crash and burn after its first earnings report.
Investors thought Twitter might be the next Facebook, with more than one billion users and tremendous demand from advertisers. Instead, Twitter's user base stalled around the 300 million mark.
The challenge for Snapchat, according to Monness, Crespi, Hardt analyst James Cakmak, will be getting investors to focus more on how much users actually "engage" with its services rather than just overall user growth.
"Since they've managed to successfully change the way advertisers think, investors should be an easier sell," Cakmak says, before adding a caveat: "So long as the growth curve remains steep."
Source: Snapchat files for $3 billion IPO
--
I base these comments on a simple valuation model that focuses on sales rather than earnings. That’s crucial for startups, since most of them—like Snapchat—have yet to produce any profit by the time they go public. Price-to-earnings ratios therefore are useless for valuing them.
Price-to-sales ratios, in contrast, speak volumes.
Snapchat parent Snap Inc. SNAP, +0.00% , for example, will at IPO have a price-to-sales ratio (PSR) of 55.6, assuming it comes to market at the midpoint of the $20 to $25 billion range reported by The Wall Street Journal. That would be higher than any other major U.S. IPO in decades—and maybe ever. (I base this on data from Jay Ritter, a finance professor at the University of Florida and academia’s leading expert on the IPO market; included are all U.S. IPOs since 1980 that, when coming to market, had at least $200 million of sales in 2016 dollars.)
PSRs almost always decline as a company grows, however, and that’s the Achilles' heel of a high PSR. In order for its stock price to not fall along with its ratio, revenue must grow just as fast as the ratio falls.
How far does the typical company’s PSR fall over its first five years as a publicly traded company? Google’s GOOG, -0.08% GOOGL, -0.07% , for example, fell from 10.3 to 4.9; Facebook’s FB, -0.36% fell from 25.3 to 11.1. In fact, according to FactSet, the median internet company’s PSR on its fifth birthday was 2.8.
Regardless of which of these numbers we use, Snapchat’s sales will have to mushroom over the next five years. If we assume its ratio in five years will be equal to what Google (now Alphabet) had on its fifth birthday as a publicly traded company, Snapchat’s sales will have to grow more than 10-fold—just in order for its parent company’s stock price to stay even.
That works out to an annualized five-year revenue growth rate of 63% per year. To put that in context, consider that U.S. IPOs that came to market between 1996 and 2007 had average five-year revenue growth rates of 26% annualized. (This according to research conducted by Ritter and two colleagues.)
Of course, you wouldn’t bet on a company if you didn’t expect it to make money. So breaking even is nowhere good enough. That in effect means you have to bet that Snapchat’s sales will grow by even more than 10-fold over its first five years. A lot more.
For illustration’s sake, let’s assume that you require a 15% annualized profit in order to compensate you for the high risk of Snap stock (higher than the overall market’s historical rate of 10% annualized, in other words). If so, then its five-year revenue growth ratio will have to be 87% per year. In other words, the company will have to nearly double its revenue every year for five years in a row.
To put that in context, consider that Google’s five-year revenue growth rate after IPO was 57% annualized. Facebook’s was 47%.
To repeat, it’s not impossible for Snap to jump over these higher barriers. As Professor Ritter pointed out to me in an interview, in the “winner take all” internet economy, a successful company could very well live up to the growth expectations embedded in a high PSR.
Source: Opinion: The math Snapchat doesn’t want you to see
--
When Snapchat's parent company filed for an initial public offering last week, investors got the first glimpse of just how richly valued Snap stock is likely to be, making the highly hyped debut likely the most expensive tech IPO in history. Snap Inc. is reportedly seeking a $25 billion valuation in its IPO, expected to happen in March.
Still, the deal-breaker for many investors is not Snap's valuation, but rather a peculiar feature of its corporate governance that is unprecedented among public companies: Snap shareholders will receive no voting rights when they buy shares in the IPO.
Snap acknowledged in its IPO filing that it would likely be the first company to sell non-voting stock in an IPO on a U.S. stock exchange. Google (googl, +0.27%) and Facebook (fb, +2.10%), whose founders also preserved significant control when they went public, created two classes of stock, with different voting rights, but did not go so far as Snap in depriving shareholders of any say in corporate matters whatsoever.
That novelty is making big-money investors balk at Snapchat. The head of corporate governance for CalPERS, one of 18 pension funds and institutional investors who sent a letter to Snap on Friday objecting to the lack of voting rights, described Snap's vote structure as "a banana republic-style approach," according to the Financial Times.
At the very least, it's the stock market version of taxation without representation, in which shareholders who buy in to Snap can only hope that its soon-to-be-billionaire 26-year-old CEO Evan Spiegel will do what's right by them, and increase the value of their stock. Spiegel and his co-founder Robert Murphy each hold more than 44% of the total voting power of Snap, together representing a super majority of nearly 89% of the votes. Here's what Snap's other shareholders therefore won't be able to do:
- Nominate, elect or replace board members
- Submit shareholder proposals
- Put pressure on the board to fire the CEO (or anyone else in management, for that matter)
- Approve or block a merger or takeover of Snap
- Find out when a hedge fund or another large investor has purchased more than 5% of the company
That last one is noteworthy because it highlights how Snapchat's owners are essentially building Snap as a fortress impervious to hedge fund activists. The non-voting stock structure means that shareholders who acquire more than 5% of the company are not required to file the usual 13D filings typical of when activist investors such as hedge fund manager Bill Ackman first buy into a company as part of a campaign to increase its value. Then again, such activists would likely have no interest in investing in Snap, given that the non-voting shares strip them of the tools that they would use to effect change, such as nominating their own candidates to the board.
As one macro hedge fund manager, who uses the Twitter handle @econhedge, tweeted (using an expletive we can't include in its entirety), "$snap can f*** right off with that voting structure."
Snap has rigged its governance structure such that even if the board did decide to fire Spiegel or his co-founder Robert Murphy, there would be little point in it: The executives would still retain all their voting power anyway, just as they would, for another nine months, even if they died. Shareholders generally value the ability to get rid of a CEO or replace directors as recourse in the event that management, say, refuses to entertain a takeover proposal or sell the company even when a buyer is interested in paying an attractive premium. Such disputes can lead to proxy fights, but Snap shareholders will have no such luck.
As Snap says in its IPO filing, its non-voting structure is "designed...to discourage certain tactics that may be used in proxy fights," but could also "have the effect of discouraging others from making tender offers for our shares." It also allows co-founders Spiegel and Murphy to further dilute other shareholders as they wish. What's worse, Snap has no intention of paying a dividend now or perhaps ever, according to its IPO filing, offering shareholders little consolation for staying silent for the duration of the ride.
Other shareholders' lack of control over the company that makes Snapchat, whose messages disappear after they are received, prompted hedge fund manager Mark Spiegel of Stanphyl Capital, no relation to Evan Spiegel, to quip on Twitter that Snap's "shares disappear 30 seconds after you buy them."
Source: Why Some Investors May Boycott Snapchat’s IPO
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