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Report: Investors Had Serious Concerns Before Snap's Terrible IPO

By NexChange
Capital Markets

The Wall Street Journal took a deep dive into Snap Inc.’s business and stock price woes on Thursday and found that investors had some serious misgivings about the company’s growth prospects and management style leading up to the company’s highly anticipated IPO, but decided to invest in the company anyway, lured in by the hype surrounding the biggest tech public offering in years.

Snap’s struggles have been well-documented: Almost immediately after the company announced its planned IPO, analysts began questioning its value, with concerns centered on slowing revenue growth, slowing user growth and mounting losses.  While shares soared to 44% when Snap made its trading debut in March, things began to quickly nosedive after that with its stock crashing to the point it was barely hovering above its IPO price, leading to a series of downgrades and Global Equities Research analyst Trip Chowdhry – a contrarian to the IPO from the beginning – saying in a note that investors were sold “snake oil.”

And now the Journal has found that Snap’s struggles are probably not a big surprise to the IPO’s investors, some of whom had concerns about the company all along. Included in the Journal‘s reporting are interviews with some of the “underwriters from about a half dozen of Wall Street’s largest firms” who were in attendance at an October 2016 presentation detailing the IPO near Snap’s headquarters in Venice Beach, California.

Interviews with dozens of people close to Snap’s listing, including bankers, investors, analysts and current and former Snap employees, show that many had concerns at the time, especially about the growth prospects for the maker of the disappearing message app Snapchat. But, in a fever for a big listing—and with about $98 million in fees at stake—they allowed Snap to set the terms. The shares listed on March 2 and soared 44% on the first day of trading.

Eight months later, after a third weak quarterly earnings report in a row, Snap shares are wallowing close to 25% below their offering price.

It seems that bankers and underwriters had hoped that Snap’s IPO would cure whatever was ailing it – and that it “would thrive as a public company,” according to the Journal. There was also hope that Snap’s blockbuster offering would send a jolt through the IPO market, which slumped badly in 2016 to its lowest level since 2003.

However, Snap’s struggles as a public company could lead other startups to remain private for longer, as the Journal notes. The company’s third quarter earnings on Tuesday showed that user growth had fallen to 2.9% compared to 7% in the third quarter last year.

The Journal also detailed a a lunch held just before Snap went public where “several hundred analysts and portfolio managers crowded into a ballroom of New York City’s Mandarin Oriental hotel to hear executives pitch the IPO and answer questions.” Among the executives in attendance for Snap was Evan Spiegel, co-founder of the company.

Some people who attended the lunch said they wanted to hear from Mr. Spiegel on many of their pressing business questions, including the company’s plans for generating advertising revenue, but that chief strategy officer Imran Khan generally fielded them.

Investors said Mr. Spiegel focused on his vision instead of the numbers, and that their questions were answered with generalities.

And while this lack of clarity rubbed some the wrong way, the fear of missing out on a potentially blockbuster IPO was apparently too much to pass up.

Sean Stiefel, manager of the Navy Capital Opportunities Fund, was among those at the Mandarin hotel. Mr. Stiefel said he had some concerns about the company—top of his mind was that when he went home at night he found himself checking too many social-media platforms, including Facebook, Instagram, Twitter and LinkedIn, as well as Snapchat. He said he worried about how Snap would be able to keep up.

Still, Mr. Stiefel didn’t want to miss out on the investment. When he called his Goldman Sachs banker to tell him he wanted to buy shares in the deal, he added half-jokingly that his order was good “for the first two price-range increases”—expecting the offering to have so much demand that the initial price would ratchet up.

Snap said on Tuesday that its quarterly losses have more than tripled. Its shares have plunged 18% since then, as the Journal reports.

You can read the WSJ’s full article here.

Photo: Getty iStock

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