The last few days have not been kind for Snap (NYSE:SNAP) ever since it reported disappointing 2017 1Q numbers. Snap, whose stock price had peaked at over $23 just a bit over a week ago, saw its price fall to $18 in the aftermath of that report which saw growth and revenue fail to meet expectations. While Snap has bounced back somewhat afterwards, it has certainly lost some of the luster it had when it launched the biggest IPO of 2017.
That gigantic IPO helped pave the way for other companies to go public, as 2017 has seen far more companies go public in comparison to the previous two tepid years. But as Snap struggles, analysts are now concerned about whether it could discourage investor for high-flying tech IPOs according to CNBC.
To which I say: Good.
If Snap fails, it will not ruin the IPO market. In fact, while Snap’s failure may lead to investor discouragement in the short term, there are plenty of emerging IPOs which can pick up the slack. And more importantly, a struggling Snap could end trends which are bad for investors in the long run. It is time that investors stop treating tech companies like strange beasts and view them as just another company.
Other Unicorn
There are plenty of reasons to worry about Snap’s poor results, but the most concerning metric is not its low revenue but its low user growth. The story which Snap skeptics have painted even before the IPO was that Snapchat was an unprofitable app with a user base whose growth was slowing down, and it would eventually be in the same tight spot that Twitter is today.
But it is not like Snap’s unprofitability is a surprise. Being profitable has become so associated with emerging tech companies that TechCrunch notes that none of the nine tech companies which have gone public in 2017 were profitable, in contrast to 2016 when the second tech company to go public was. While investors of course should bet on growth, there needs to come a point when tech companies can show they have a path to profitability and stop slapping on that “This company has never been profitable and may never will” disclaimer on their SEC reports.
Investors need to start reconsidering the important of profitability when looking at tech companies, and Snap’s struggles are a warning of what can happen when investors jump on a sexy buy without seriously considering the metrics.
A Call for Accountability
Snap’s struggles are far from the biggest way in which it could harm the IPO market. Snap’s biggest long-term concern for investors is its decision to not grant buyers any voting rights in the company, leaving CEO Evan Spiegel and his friends in sole charge of the company.
This was a concern for Snap’s investors, as Spiegel has not shown that he has the acumen to lead Snap through tough times like what the company is currently seeing. But the bigger concern is the example which it could set for other businesses who may try the same thing if Snap is successful.
Snap will point out that other tech companies like Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) sell voting shares which come with highly limited voting rights, but that is simply whataboutism.
Investors should not just be passive buyers of a stock, but active agents who collectively own a portion of the company along with accompanying voting rights. But if Snap struggles partly because Spiegel is too arrogant to make hard decisions (a recent conference call where he was dismissive of Facebook did not dissipate those worries) and there is no one who can oust him, it would show the weakness of such a voting approach.
Snap may struggle for now and that may be concerning for the IPO market. But investors will take their money elsewhere, and the company’s struggles could put an end to trends which are making investors gullible and not willing to play a role in the companies they invest in.