This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
It’s tough to tell which tech IPO will prosper, and which will fail. There was plenty of scepticism around Google and Facebook when they listed, but in the long term, believers were the winners. Google is up almost 2000% since its listing in 2004 (including a 2014 stock dividend), and Facebook has gained 252% since 2013. Meanwhile, Twitter and Groupon, as well as hot camera stock GoPro, have faltered and remain under pressure.
We can point to seemingly crazy valuations as a reason why the post-IPO hype will not last for Snap. It only has a track record of two years of creating revenue, and loses $1.27 for every dollar of sales in 2016. Yet tech IPOs are not about current revenue, or profit. They base their investment case on use, specifically on daily active users (DAUs). Here Snap has the advantage as it has 158 million DAUs versus 30 million for rival Instagram when Facebook bought it in 2012 for $1 billion.
At a market cap of around $34 billion, each Snap DAU is worth $215, which is more than six times that for Instagram. The latter now has 300 million DAUs, which would make it worth over $60 billion on a similar metric to Snap. In addition, Snap saw 48% DAU growth in 2016, which is perhaps the ultimate growth stock.
However, growth slowed down in the fourth quarter and, even more worryingly, its Stories function has become less, not more, popular with users. Snap will have to work hard to squeeze more revenue out of users without driving them away. Facebook managed this trick, but Twitter hasn’t.
The great investor Charlie Munger, partner of Warren Buffett, said that his goal in investing is not to be the smartest, but to be less stupid than everyone else. Perhaps rushing to buy Snap now for the long term would be imprudent. A better strategy would be to wait for a much cheaper valuation, when the downside is reduced and the ‘margin of safety’ is wider. Only time will tell, but for now I err on the side of caution.
.jpg)
