It was supposed to be “the biggest tech IPO since Facebook.”
A little over two years ago, Snap Inc (NYSE: SNAP) — the owners of the popular Snapchat app— was in the final stages of preparation for listing on the NYSE and everyone wanted a piece of the pie.
Snap went public on March 2, 2017, and ended the day valued at more than $30 billion. That success was short-lived though, and what followed since has been a tough ride for early investors.
Shares of Snap are now down almost 50% from all-time highs. Daily active users (DAUs), the lifeblood measure of its flagship Snapchat app, are virtually stagnant. A raft of high-level execs have abandoned ship, with the most recent — CFO Tim Stone — lasting less than a year in his role.
Where did it all go wrong for Snap?
Snap Inc was founded by Evan Spiegel and Bobby Murphy back in 2011 (then called Picaboo) and quickly earned the reputation of a company happy to court controversy. Rapidly gaining a significant following amongst younger smartphone users — 100,000 DAUs by 2012 — the fledgling business first came to the attention of many investors when it spurned an offer of acquisition from Mark Zuckerberg in early 2014.
More on that later.
It might not have been surprising that Snap wanted to go at it alone though; it was unquestionably a company on the up. A 47,000 sq.ft office on Venice Beach, another international headquarters established in London, the acquisition of some popular social media fads like BitStrips (bought for $100 million), and more media attention than you could shake a stick at. CEO Evan Speigel even married the Australian supermodel Miranda Kerr. What wasn’t there to love?
Based on this, it’s understandable that the roadshow Snap built around their impending floatation was a big affair. The company went as far as to produce a 35-minute long video about itself, in which Speigel boldly claimed that Snap was “at the beginning of what cameras can do.” A closer look, however, showed that all was not as it seemed.
Though the PR drive was impressive, the official documents painted a different picture. For example, Snap was notably calling itself a ‘camera company’ in both its hype-video and its S-1 filing, despite the fact that they hadn’t really made any cameras to speak of.
That is, of course, unless you count their infamous Spectacles — a pair of sunglasses with tiny cameras on the rims that allowed you to record short video segments. This product — the company’s first hardware launch — was an unmitigated failure, with Snap forced to write off $40 million worth of unsold inventory three months later. More recent incarnations remained about as unpopular. Not exactly Nikon or Kodak, it’s fair to say.
More worrying than misaligned titles was the company’s admission that daily active user growth — a self-proclaimed “critical measure of our user engagement” — was beginning to flatten. Here’s the extract from the S-1:“… although Daily Active Users grew by 7% from 143 million Daily Active Users for the quarter ended June 30, 2016 to 153 million Daily Active Users for the quarter ended September 30, 2016, the growth in Daily Active Users was relatively flat in the latter part of the quarter ended September 30, 2016.”
To cut a long story short, the rapid growth that Snap had enjoyed in its infancy was starting to flatline and it wasn’t exactly clear how management intended to combat this, particularly with an IPO and tons more public scrutiny on the horizon.
To cut it even shorter, the early-days hype was simply wearing off.
Of course, it’s impossible to talk about Snap without mentioning its leader and public face — Evan Spiegel.
Together with his co-founder Murphy, Spiegel controls almost 90% of the voting power at Snap. This is down to the complex way in which the company’s stock is structured — a triple-class share arrangement that allows them to control essentially all decisions, despite having only a third of the company’s economic shareholding.
By comparison, Facebook chief executive Mark Zuckerberg controls about 60% of Facebook’s voting shares (which is still quite a lot).
Such an imbalance of power in directing the course of the company has evidently become reflected in the company culture at Snap. For example, a leaked memo sent to all employees early last year threatened that “you will lose your job and we will pursue any and all legal remedies against you” if found to share information outside of the company. Other former employees have said that working at Snap is like “swimming in a shark tank” and that ingratiating yourself with Spiegel and his inner circle is the only way to succeed at the company.
This toxic atmosphere is perhaps best understood in the context of the infamous app redesign in early 2018 — a disastrous exercise that cost the company roughly 3 million DAUs in the weeks after launch. Various reports allege that Spiegel was warned by numerous people ahead of the launch that more time was needed for the design, but he forged ahead anyway… with predictable results.
Or the continuing failure of Spectacles — still the company’s only hardware product to date. Spiegel’s determination to pursue this sunk-cost fallacy was apparently the main reason why CFO Drew Vollero (no, not the most recent guy, the one before that) left in the middle of last year.
In a recent Wall Street Journal profile, Mr. Spiegel was described thusly:“Unlike many tech executives, Mr. Spiegel, 28, hasn’t relied heavily on data for most of his decisions. He considers himself a designer, say some former employees, and often responds better to presentations rooted in emotional responses to the company’s products and strategy rather than numbers.”
Not exactly the type of cool-headed approach you look for in a CEO.
As already mentioned, Snap’s S-1 filing left a lot to be desired for potential investors. There was one line in the ‘Risk Factors’ section of the filing, however, that was particularly prophetic about the company’s immediate future.“Snapchat is free and easy to join, the barrier to entry for new entrants is low, and the switching costs to another platform are also low. Moreover, the majority of our users are 18–34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement.”
In light of this, let’s not forget that the founders of Snap had already spurned one of the pioneers of social media, Mark Zuckerberg. In doing this, they had made probably one of the worst enemies possible.
When Facebook bought Instagram for an eye-watering $1 billion back in 2012 (before Facebook had even publicly-listed itself), Mark Zuckerberg was roundly mocked. The photo-sharing app had a modest user base of 30 million and had only just launched an Android app in the weeks previously.
For instance, one comment from a writer for The Verge mused over this monumental mistake of Zucks, imagining:“Mark Zuckerberg entering Instagram HQ and discovering hundreds of college interns setting photos on window ledges to age in the sun.”
Regardless of your personal opinion on Zuckerberg or his data-collecting empire though, the man knows how to scale. With Instagram, he had a relatively popular photo-sharing platform that he could unashamedly use to go after Snap.
Ok, so perhaps it’s a little hyperbolic to suggest that killing Snapchat was the only use that Zuckerberg saw for Instagram. But the way Facebook repositioned Instagram — particularly with the release of Instagram Stories in August 2016 — was arguably nothing more than Zuckerberg taking Snapchat’s basic ideas and making them better.
Instagram has been nothing less than a Snapchat-killer since. The Stories element has been a huge driver of growth for the app, mentioned a total of 71 times in the company’s Q3 earnings call last October. The most recent user count figure for Instagram sits at a jaw-dropping 1 billion users, while Snapchat has just 190 million. Instagram’s ‘Stories’ feature alone had 500 million DAUs as reported in January of this year.
In fact, such is the impact that Instagram has had on Snap is that there is even a shareholder lawsuit against Snap which alleges that management misled the public about how competition from Facebook’s Instagram had affected the company’s growth.
The lesson? If you come at Mark Zuckerberg, you better not miss.
In the run-up to Snap’s IPO, we received dozens of emails and messages from investors asking us to add Snap to our hand-picked list of great investment opportunities in the MyWallSt app.
We were tempted but, in addition to pleasing our users with exciting new stocks, we have the ultimate responsibility to provide only the best and most researched stock selections to our community. Despite the excitement around Snap, there were just too many question marks over some of the key things we look for in an investment — namely management, company culture, vision, and economic moat.
In fact, simply the notion that Snap was calling itself a camera company showed to us that management wasn’t (and arguably still isn’t) entirely sure of the role it fulfills for users.
In spite of recent woes, it’s by no means the end of the road for the Snap. However, eight years after being founded and with still just one limited product to earn advertising dollars from (again, we don’t rate Spectacles), we can see a severe limit in Snap’s ability to compete with more attractive offerings. That first-mover advantage Snap carved out for itself with the Snapchat app has long since eroded, and now we’re all left wondering what the plan for the future is.
The real value of the Snap story for us is the cautionary note it strikes for investors, particularly novice ones facing the IPO of a well-known consumer-facing brand. With a host of high-profile IPOs already coming this year, the most valuable lesson to take from Snap is to make sure you don’t (always) believe the hype.
And, if a company says that it makes cameras, make sure it actually does.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Facebook. Read our full disclosure policy here.
Head of Content and Publishing at MyWallSt
James is the head of content and publishing at MyWallSt. James’ favorite stock is Teladoc because he believes that they are at the forefront of revolutionizing the healthcare industry.