Maybe the most pressing question posed to Evan Spiegel, cofounder and CEO of Snap Inc. (NYSE: SNAP), by Wall Street is what possessed you to go public in the first place?
Shares of Snap fell short of almost every expectation that Wall Street had set for its first-quarter report.
The Venice-based app developer reported revenue of $231 million, which was below consensus expectations of $244.5 million. And its daily active users, the essential metric of any online service, came in at only 191 million. This was short of the expected 194 million.
Snap lost almost $386 million in the first quarter alone, too. And the release of its first-quarter results knocked another $4 billion off the company’s value. It’s now down a total of $23 billion from its high point, which was a day after its IPO last March.
When speaking with Wall Street analysts on a conference call, Spiegel’s performance underscored the folly of giving an untested entrepreneur so much control over a company. Combined with his cofounder Bobby Murphy, Spiegel holds more than 88% voting control over Snap.
Pressed by the analysts to explain how he plans to reverse Snap’s dismal results, Spiegel instead repeatedly referred to the company’s “mission” — seven times, to be exact — during the half-hour call.
Sounding like a bargain-basement version of Facebook CEO Mark Zuckerberg, he described Snap’s mission as helping to “empower people to express themselves, live in the moment, learn about the world, and have fun together.”
He never directly answered the analysts’ insistent questions about how the company will improve on Snap’s poor first-quarter results. Instead, Spiegel chose to reiterate that his company distributes the smartphone app Snapchat — which is aimed at younger users who use it to communicate with friends via picture messages, chats, and short videos — and sells advertisers space on the platform.
Other Snap team members made things sound even worse during the conference call…
Second-quarter revenue growth will “decelerate substantially” from the first quarter, they stated.
The number of daily active users in March 2018 was lower than the average for the first quarter as a whole. This is a sign that Snap’s user base may be starting to slip into the void. But Spiegel added, clutching at any straws that he could, that the March figure was still higher than it was in fourth-quarter 2017.
The Snap team as a whole blamed all the negative news about the company on advertisers alone and implied that the negative press was undeserved. But the hard numbers released by the company last Tuesday show that it actually isn’t negative enough.
In response, stock investors voted with their feet last Wednesday. Snap shares were down almost 19% that day, sitting at $11.60.
Remember the company’s initial price offering (IPO) a year ago? The shares closed at $24.48 on the day of the IPO. But after the first few days, they never saw that number again.
And that brings us back to the issue of why this company decided to go public in the first place.
The company’s original backers include some of the premier venture funds in Silicon Valley: Benchmark, Institutional Venture Partners, and Kleiner, Perkins, Caufield & Byers. They all have extensive experience in nurturing startups. And they allow them to test variations of their business models and make mistakes within the tolerant confines of private ownership.
That way, any missteps can be part of a learning experience rather than a stock market train wreck.
But Spiegel and Murphy traded in that security for a big IPO payday, which ludicrously valued the company at $33 billion and raised almost $2.5 billion. In one day, they became multimillionaires and, on paper, billionaires.
But they don’t deserve all the blame for their bad decision. The venture investors allowed the IPO to happen because exiting into an IPO would give them a big payday, too.
And from seeing how Snap operated on the inside, they may have also decided that the smart move would be to get out while the getting was good.
The venture investors also enabled Spiegel and Murphy to create an ownership structure that gave two untested entrepreneurs immense voting rights.
Their voting rights are so immense that they’ll continue to have control of the company even if they’re fired, which is unlikely considering their voting control. And they would even theoretically have control of the company from beyond the grave. This is because their super-voting Class C shares won’t be converted to minimally voting Class B shares until nine months after their deaths.
That would be a little acceptable if it were indisputable that Spiegel and Murphy knew what they were doing.
Earlier this year, the company rolled out a redesigned app that was met with near-unanimous disapproval by users. Users have complained that the redesign is confusing, makes it difficult to find their friends’ most recent messages and the most relevant stories, and gives advertisers too much unavoidable presence.
“A lot of people are going to flee the platform, much like myself,” a video performance artist named Davison posted on YouTube. “Now it’s this bloated, complicated mess.”
In response to the redesign, many former Snapchat users are instead heading to Facebook’s Instagram app. And as its first-quarter report illuminated, Snap can’t afford a mass user exodus.
When he introduced the permanent redesign late last year, Spiegel told users that the goal was to make the app “more personal” and also provide advertisements that were more personalized. But what really drove the redesign, plainly, was the need to give advertisers more access. But advertisers won’t have a need for a platform that’s hemorrhaging users.
The company says, despite the calls to do so, it wouldn’t be reverting to the old design.
Spiegel told the analysts during the conference call that “a change this big” comes with “some disruption.” This was like a figurative shrug to users’ discontent.
Instead of listening to advertisers, Spiegel and the Snap team need to listen to their users…
Because they’re speaking loud and clear.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today