Yahoo Finance Private equity CEO: You'd have to be 'suicidal' to hold Snap stock
The investment community is buzzing about Snap’s much-hyped $3 billion IPO filing on Thursday afternoon. The parent company of ephemeral messaging app Snapchat could be valued at up to $25 billion when trading starts on the New York Stock Exchange.
Bears like Eric Schiffer are already showing their claws. Schiffer is the CEO of the Patriarch Organization, a private equity firm focused on media properties in the digital space.
“Investors have to be suicidal if they want to hold this stock,” Schiffer told Yahoo Finance.
He elaborated, “Millennials were using it like an IV. It was something other than what your parents were using, which was Facebook. Gen X and the baby boomers think it’s hot but they also haven’t figured out that it’s dying.”
Schiffer’s comments may come across as hyperbolic and even contrarian, given that Snap has been one of the fastest growing companies over the last few years. It has become the go-to social media destination for many teens and young adults. A Piper Jaffray survey found 28% of teens think Snapchat is the most important social network. Instagram came in close-second with 27%, according to the poll of 6,500 US teens.
Despite its popularity, Snap has grown vulnerable to competition — specifically Instagram, which launched a carbon copy of Snap’s popular Stories feature last August that’s accrued 150 million daily users within a short five months. Instagram itself has 400 million daily active users. Most recently, Instagram announced it would put ads between stories, another move directly from Snapchat’s playbook. Instagram CEO Kevin Systrom has even acknowledged that Snapchat “deserves all the credit.” Instagram’s parent company Facebook (FB) is also planning to roll out a similar product imminently. Execs at Instagram and Facebook seem to unabashedly subscribe to the philosophy that imitation is the greatest form of flattery — this time, unfortunately, at the innovator’s expense.
Snapchat currently has 158 million daily active users. This represents a cool down in growth, and appears to be correlated with the roll out of Instagram stories. The app experienced a meager 3.2% increase in daily active users between Q3 and Q4 of last year. This falls flat compared to the 7%, 17.2%, and 14% quarter-over-quarter growth the company has experienced over the last three quarters.
In the company’s SEC filing, Snap even acknowledged that its growth rate has been slowing and cited several reasons explaining its “lumpiness in growth.”
“We believe that the flat growth in the early part of the quarter was primarily related to accelerated growth in user engagement earlier in the year, diminished product performance, and increased competition,” the filing stated.
Instagram’s ability to rip off Snapchat’s core feature so seamlessly and successfully is a core concern for Schiffer.
“Snap doesn’t have a competitive, unique differentiator anymore. Instagram can and is putting a knife right through Snap — and [CEO] Evan Spiegel’s — heart,” he said. “It’s going to be the greatest investment loser of the 21st century. They’re going to get buried alive. The users are jumping ship.”
In an attempt to diversify its offerings, Snap strategically positioned itself as a “camera company” when it launched camera-equipped Spectacles in November. While the allure of Spectacles once created 18-hour lines outside of the NYC flagship store on 5th avenue, that store is now mostly empty.
Schiffer calls Spectacles “a desperate move,” saying it hasn’t caught on with the masses and appears gimmicky.
“The company is looking for another revenue stream because they know they are in a vulnerable position,” he said. “Spectacles are a spectacle.”
Though Snap is facing some serious headwinds ahead, Chi-Hua Chien, a co-founder and partner at Goodwater Capital who has been investing in consumer tech startups for 20 years, sees incredible potential for hardware like Spectacles.
“The idea about owning the camera is really compelling. If you think about a world where your entire life — everything you see — is recorded and uploaded into the cloud and segments of that are used in the form of video or photo to share, that’s a pretty big market opportunity,” he told Yahoo Finance.
But with 96% of Snap’s revenue last year coming from advertising, the company stands to lose big if it doesn’t introduce other products or when platform-agnostic teens start obsessing over a different, cooler social media platform.
Indeed, rather than seeing the company’s public debut as an exciting next chapter for Snap, Schiffer says it’s “the end of the show for Snap, not the beginning.”
Of course, naysayers will always pooh-pooh any hyped-up company, and Schiffer’s remarks resemble the bearish commentary about Facebook before it went public in May 2012 (though the market conditions were significantly more bearish overall during that time).
And, like Facebook, Snap has ensured that its cofounders have overwhelming voting power. Spiegel and CTO Robert Murphy hold nearly 89% of the company’s voting power and all shares available during its IPO will hold no voting power whatsoever.
This means that, as a Snap shareholder, you won’t get to express your opinion about whether it should pursue new, potentially capital-intensive innovation. You just have to be a die-hard believer in Spiegel and trust his vision for the company.
For older investors who might not use Snapchat, it might be difficult to trust Spiegel’s vision. Charlie Munger expressed this sentiment when he explained why he didn’t want to invest in Facebook.
“I don’t invest in what I don’t understand. And I don’t want to understand Facebook,” Munger said at Berkshire Hathaway’s (BRK-A, BRK-B) annual meeting prior to the Facebook IPO.
While everybody might not understand Snapchat, it’s undeniably a juggernaut. Chien notes that generally, in consumer markets, the winner ends up taking all and competition becomes a “two-horse race” — the question is whether Instagram or Snap will prevail.
Melody Hahm is a writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Read more from Melody here & follow her on Twitter @melodyhahm.
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