B&T’s very own financial wizard and account man, John Hromin, takes a look at last week’s Snapchat float and argues a social media platform whose audience has little or no money to spend is on shaky ground indeed…
Just when you thought it couldn’t get more insane desperate buyers fearful of missing out on the next Facebook added another 11 per cent to the SNAP share price on Friday to value the company at over $US52 billion. While the company lost more than $US 686 million last year it is now worth more than Australian behemoths Woolworths and the Bank of Queensland.
SNAP’s very first investor was Australian Jeremy Liew who invested $641,000 in 2012 and whose profits on paper currently stand at almost $A2.7 billion. Nice work if you can get it.
Regarding the SNAP IPO, if you had studied finance anytime up until the mid-1990’s, fallen asleep for 20 years and woken up today, you would conclude that the opposite of everything you learned is now the truth.
In the dot-com era of the late 1990’s Alan (the Maestro) Greenspan – chairman of the US Federal Reserve coined the “new economy”, and supported by analysts like Henry Blodget then head of the global Internet research team at Merrill Lynch, argued stock valuations could be derived from the number of “clicks and eyeballs” received by a company’s website. We all know how that era ended.
The challenge for SNAP is not about making money but rather how to grow the social media company primarily used by 13-25-year-old demographic who quickly tire of the latest fad and of half of whom don’t have any money to spend. This turns off advertisers.
The overarching issue is whether the action in the SNAP IPO is part of the greatest sucker’s rally of all time. Scott Gallaway professor at NYU’s Stern School of Business and the founder of Firebrand Partners, Hedge Fund seems to think so. Professor Gallaway says that SNAP is a loser and will mark the top of the social media market.
We will wait and see. As John Maynard Keynes famously said ”The market can remain irrational longer than you can remain solvent”.