Snap Inc

2017/02/12

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” George Soros

Among the major business news of 2017 are the Dow20000 and the Snapchat’s parent company filing for an initial public offering (IPO). Both of these events are related as many research have shown that corporations choose to offer new shares to the public when the stock market is near a peak. (see National Bureau of Economic Research: Corporate event and market timing).

Snap IPO is planned to raise $25 billion. According to their S-1 filing, the company made $404.5 million in revenue, up almost 7 folds from last year which is very impressive. However, on the $404.5 million in revenue, the company lost $514.6 million, the majority of the expenses are for storage and hosting fees ($451.6 million). Snap loses $1.27 for each $1 they earn. In its 5 years of operation, Snap has accumulated $1.2 billion in deficit, with no plans to turn profitable anytime soon. Do these financials warrant a $25 billion valuation?

If Snapchat was a company owned by your neighbor, and he comes to you asking how much would you pay to own his business. Would you answer “$25 billion sounds fair to me” or would you smile and tell him politely that you’re not interested?

With $25 billion, I would purchase all Hilton hotels and resorts (over 4700 hotels). They generate $11.6 billion in revenue. And net income of $1.5 billion a year (more than what Snap generated in its entire history). And I would still have $5 billion in pocket change.

IPOs are regarded by many “investors” as a quick way to build wealth, a get-rich-quick scheme of sort. Everyone is looking for the next Microsoft. After all, if you bought Microsoft IPO in 1986, your $2,100 investment for 100 shares is worth over $1,800,000 today!

Unfortunately, for every IPO like Microsoft that turns out to be a success, there are thousands of losers. Only 26% of IPOs were profitable in 2016 (https://site.warrington.ufl.edu/ritter/files/2016/12/IPOs2016Statistics_Dec21_2016.pdf) Similar to a lottery ticket, we only focus on the few winners but we conveniently overlook the fact that thousands of people lose every day.

An intelligent investor should conclude that IPO does not stand for “Initial Public Offering” only, but also “It’s Probably Overpriced”.

Sid El Mehdi Lembirik

Managing Partner,

Lembirik Group Investments

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