Only a few weeks ago Snapchat was floated on the US market in a blaze of glory with the shares moving from an initial float price of $17 up to $30 a share. Everything seemed to be going well, the company had been welcomed by investors, there were high hopes for the future and it became one of the best performing technology IPOs of recent times. However, only yesterday we saw the shares fall by around 25% and they are now just hovering above the $17 float price.
First-quarter loss of $2.2 billion
The company announced a first-quarter loss of $2.2 billion although interestingly around $2 billion of this loss was down to staff bonuses which were triggered by the IPO. So, while the company did make a significant loss in the first quarter, around $2 billion of this will not be repeated next time round. So, why have the shares fallen so dramatically if the figures are not as bad as they first look?
Unfortunately growth in the use of Snapchat services has fallen from 47% in the previous quarter to 36% year-on-year. In any other business growth of 36% would be welcomed but having fallen back from 47% and still a relatively young business, this is disappointing. The company also confirmed that 8 million new users were signed up in the first three months of 2017 which was again less than analysts had expected.
Competition is emerging
Over the last few months we have heard rumours and counter rumours from within Facebook suggesting that the company is looking to replicate the Snapchat style of communication with its own customers. The obvious problem is that while Facebook will likely retain its own customers it could effectively “steal” new users from Snapchat at a time when the company should be growing. To be fair to the Snapchat management they have no fears about others trying to copy their technology because when you are successful this is exactly what happens.
When you bear in mind the initial $24 billion IPO valuation of Snapchat it would be foolish to suggest that the management do not have plans for the future. If you take a step back and look at things from a distance, these are founders who built up this business from nothing and turned down an offer of “just a few billion dollars”. They are not in this for the short term and indeed they seem to understand the long-term value better than most. So, over the next few months we can expect an array of announcements from Snapchat with new services, new ideas and perhaps bolt on acquisitions.
Technology shares can be volatile
It just shows that having increased from $17 to a high of $30, Snapchat very quickly fell out of favour and is now just hovering over the initial IPO price. Snapchat is not the first technology-based company to fall out of favour because we saw similar situations with Facebook and Twitter. At the end of the day technology shares are more prone to volatility because of the constant need to grow their business and grow their customer base.
If the economy is starting to turn down then attracting more business and new customers becomes even more challenging. As a consequence, the risk reward ratio changes and investors look to buy at lower prices because of the changing environment. However, when markets are flying high it is stocks such as Facebook, Twitter and Snapchat which very often benefit from the change in investor sentiment.