Snap shares fall below offer price
Analysts expect the company’s stock, which fell 12% on Day 3, to keep dropping.
Snap Inc.’s stock market debut last week has been celebrated as a success in the tech world as the share price surged the first two days on the market. But that optimism doesn’t necessarily extend to Wall Street, where analysts remain doubtful of the company’s current value.
Shares of Snap opened at $28.17 on Monday morning, up about 4% from their price at the close of markets Friday and up 66% from the $17 price paid by investors in Snap’s IPO last week. But they fell just below $24 — Snap’s initial trading price — when the session ended.
That’s still above what Wall Street analysts believe Snap shares are worth. Of seven analysts surveyed by FactSet who cover the stock, none has issued a “buy” rating for Snap, and all have set their fair value estimate or target price between $10 and $23.
“It’s overvalued,” said Brian Wieser of Pivotal Research Group, a financial analysis firm. “That’s the simple answer.”
Wieser set the year-end target price for Snap’s stock at $10 and gave it a “sell” rating based on his estimates of the company’s future profitability. “To get to the [current] valuation requires willful optimism about the fundamentals,” he said.
In a report on Snap last week, Wieser pointed to the company’s high costs — which include hosting, serving and creating content, as well as sharing revenue with content partners — and its “sub-optimal corporate structure” with relatively inexperienced managers at the helm.
Analysts were also concerned about Snap’s ability to grow and to compete successfully with Facebook, which has 1.2 billion daily active users compared with Snapchat’s 158 million.
Laura Martin, an analyst with Needham & Co., said Snap’s narrow target demographic and bandwidth-intensive app limit its potential audience to young people in first-world countries. She estimated the total size of that audience to be about 650 million, compared with 3.6 billion each for Google and Facebook.
And even within its core demographic, Snap faces competition from copycats, Martin said.
“If you’re a Snap shareholder, you get hit with all the failures as they experiment and then when they have a win, Facebook copies it,” she said. “They have no protection.”
Instagram, for example, launched its own version of Stories, a Snapchat feature in which users can post a sequence of photos or videos that are available for viewing for 24 hours, last August. Snap’s growth slowed sharply in the fourth quarter of 2016.
“The major risk for Snap is the possibility that its coveted demographic of younger users finds Facebook’s collection of apps more appealing than Snap’s and migrates over,” wrote Victor Anthony, an analyst at Aegis Capital Corp., in a report initiating his firm’s coverage of Snap last week.
Adopting Snap-like features doesn’t just mean Facebook can retain or attract young users. Advertisers, too, will stick with the platform.
“Large advertisers still view Snap as experimental,” said Anthony in an interview by phone, but they feel more comfortable with Facebook. “It’s a platform they know whose return is proven.”
That’s a problem for Snap, which, like other social media companies, makes its money from advertisers, not consumers. The bulk of Snap’s $400 million in revenue last year came from selling ads that appear on the Snapchat app, and ads are expected to be the main revenue driver for the foreseeable future.
So how come the stock is still trading far above its $17 offering price?
“There’s a lot riding on the success of the Snap IPO,” Anthony said. After a drought of technology IPOs in recent years, investors are hoping this one will succeed and open the floodgates to other tech IPOs, Anthony said.
On top of that, most of the investors who have thus far bought Snap shares are institutional investors — big funds and corporations, such as NBC-Universal, which purchased about 15% of the shares available in last week’s IPO. Many of these investors have committed not to sell their shares for at least a year, Anthony said, meaning there’s a limited supply available, which drives up the price.
And all the buzz around Snap’s IPO may be tempting small and individual investors to buy, said Anthony, pushing up demand.
Though he expressed concerns about Snap’s ability to grow and the formidable competition it faces from Facebook, Anthony said he surveyed several advertisers and found they are eager to get in front of Snap’s coveted demographic.
“We see Snap as a sustained ad share gainer over the next two years,” he wrote. “That alone should lead to share price performance this year.”
A private equity f irm for apps
The private equity firm founded by Walt Disney’s nephew Roy is staking a big claim in the next generation of entertainment.
Shamrock Capital put up $30 million for acquiring and improving undervalued mobile apps — the leading gateway to the Internet for many consumers today.
It’s up to veteran Los Angeles entrepreneur Clark Landry and former video game executive Michael Ritter to decide how to spend the funds. Their firm, Maple Media, has bought several undisclosed mobile apps already. They are generally looking at apps with thousands of users and some small amount of revenue. But the hope is that Ritter’s experience, along with cost efficiencies gained through sharing services across apps, can boost the value of each app.
Some of the steps Ritter is undertaking are simple. Many game apps created by one person or a small team don’t have tailored prices for virtual goods sold in their game to the various countries in which players reside. Buying a new life in a game might cost 99 cents in the U.S. but $1.42 in New Zealand. Adjusting the New Zealand price to a round number such as $1.50 can be enough to boost sales there. Lowering the price in poorer countries such as India can lead to more play.
“There’s a lot of money going into advertising these apps, but the developers don’t really have the expertise” making money and managing the apps after launching, Ritter said.
Maple Media is considering apps involved in gaming, productivity, entertainment, social media and more. Sometimes, it will retain the creators of the app on Maple Media’s development team.
The short-term goal is to end up with several million daily users across the Maple Media portfolio of apps. Hitting that threshold could lead to more lucrative deals with companies seeking to advertise in those apps. So far, Ritter says Maple Media has 500,000 daily users through acquisitions.
Ritter and Landry said they haven’t settled on a plan for what happens if they successfully extract more sales, usage and life out of an app they buy. Would they sell it back to the creator or another company? Would they spin it off into a separate entity?
“I think we’ll be opportunistic there,” Landry said.
They’ll also be able to ask Shamrock for more money at any time if, for example, they show that spending more on advertising can lead to a commensurate increase in sales on the app, he said. Last year, Shamrock put together a $700-million investment fund, which is contributing to Maple Media.
Double M Partners eyes a new fund
Los Angeles venture capital firm Double M Partners has pooled about $18 million toward a target of $40 million for a new investment fund, according to a regulatory filing. Double M primarily invests in software companies, including those in advertising, retail, mobile gaming and communications. Most of the companies are in Southern California, with leading names such as Scopely and Tradesy.
Mark Mullen, the veteran investment banker who’s managed Double M since its founding in 2012, declined to comment.
Coming up
The annual Montgomery Summit technology conference returns to the Fairmont Miramar Hotel in Santa Monica Tuesday through Thursday. Featured speakers include Lynda Weinman, founder of LinkedIn-owned online education service Lynda.com, and Zillow Chief Executive Spencer Rascoff.