Snapchat: Activism Before Activism?

Snap, Inc. (Pending:SNAP) is the parent company of disappearing message app Snapchat that will hit the public markets next month. Its valuation, like many hot tech IPOs, will be rich. However, this could be investors’ chance to tap into the millennial generation and the hot social media trend.

Snap is expected to come in at a $25 billion valuation, more than twice the market cap that Twitter (NYSE:TWTR) currently trades. Yet, it’s been a quiet year for IPOs, which means the demand from investors is in Snap’s favor. Still – are investors hungry enough to pay 60x sales for Snap shares? When Facebook (NASDAQ:FB) trades at less than 15x and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) at 6x.

Is it possible that Snap turns out to be a “busted” IPO, where daily user growth is slowing and competitors like Facebook and Instagram are rolling out their own versions of Snap stories? Snap is likely feeling the competitive pressures, as the Instagram Stories launch coincides with slowing Snapchat user growth. Snap realizes it’s now or never for an IPO.

But the bigger issue, which could be attractive for an activist investor, is that Snap founders are keeping almost total control of Snap following the IPO. Granted, an activist getting enough of a stake to really shakes things up might be difficult.

The big play for investors could be playing wait-and-see. Snap could end up much like the last major tech IPO – Facebook. Shares of Facebook faltered after its IPO, soon falling below the offering price. At the time of its IPO, Facebook also was generating 10 times the sales that Snap is today.

Snap’s IPO paperwork, the Form S-1 from earlier this month, wasn’t all that great either. In part, investors are realizing that it’s not Facebook. Snap already is seeing slowing user growth – with user growth coming in at 3.3% in 4Q, down from 7% growth in 3Q.

Yet, for the first two quarters of 2016, daily users grew over 15%. Recall that stalling user growth and inability to fully monetize users has been the downfall of Twitter – as shares are now well off the $26 iPO price.

Activist opportunity?

Then, of course, there’s the corporate governance issue at Snap. Snap is issuing non-voting shares in its IPO. An unusual move for a U.S. IPO. In fact, they’ll be the first company ever to issue non-voting shares in an IPO.

Co-founders will have voting control of nearly 90% of shares. No one has a say in board members and it will be rather insulated from an activist. This type of structure is troubling, as outside shareholders would have no voice at all. While there’s never been a non-voting IPO issuance, there have been dual-class IPOs, and many of these companies underperform. Consider Zynga (NASDAQ:ZNGA), Groupon (NASDAQ:GRPN) and GoPro (NASDAQ:GPRO), all of which are off more than 70% from their IPOs.

The expected Snap IPO welcoming might not be joyous – in the interim that is. In the short term, it wil likely move higher as investors are hungry for tech IPOs. But the longer-term viability of its business model – where it’s already spending two times its revenues in costs – is questionable. Getting ad dollars and figuring out monetization for social is tough, as seen with Twitter. Activist investors can target companies with dual-class and unequal structures, although it’s not easy, but for a non-voting class, it’s nearly impossible. There will be virtually no accountability for management. The Snap IPO remains questionable in the rapidly changing tech scene.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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