As we sit here today the IPO that was supposed to prove that the dream of “its different this time” were still alive and well has shown it is anything but. The real crush for the “crushing it” crowd is this – the reality that proves that the party is over came from both a business and service whose main product did nothing more than augment reality as to add cartoon features to pictures then disappear into the ether. And this you were told was why it should be worth 10s of $BILLIONS of dollars in market cap.
As inane as that was, what became all to surreal was when this concept was applied to its S-1 where the reality of its business plan appeared to be nothing more than a “pig in lipstick” matching its core product features.
And “The Valley” along with the entire tech world in general not only believed it, but argued that this business was worth those $10’s of BILLIONS of dollars even though the company itself stated in its own business plan that not only was it not profitable – it may never be.
Sounds logical only if you live in the augmented business view of “The Valley.” Too the rest of us in the real business world? It’s crazy talk. Plain, and simple.
The compounding issue that Snapchat™ is generating (for it’s not reserved solely within the virtual world) is the near laughing-stock faces that appear to be growing across one of the most least informed investor public of this era: The hordes of Millennials who lined up to be “first” much like they used to for an iPhone® release (remember those?) and bought shares as soon as they became available to the public at $24. And the higher it went, the more they bought, and the better the felt.
Then, as soon as it begun – it was over.
To truly understand just how quickly this entire debacle in the making has fallen, let me express it this way:
Since going public on Thursday, March 2nd, its shares had risen some 44% from its IPO price of $17 to its opening exchange price of $24 to then zoom to near $30. This was greeted with exuberance and cheer not only for those who got in line to be “first.” But was also used by much of the tech press as to show just how “worth it” this debut and idea was.
Yet, it didn’t stop there.
If you turned on your financial/business media program of choice the results were the same. The accolades coming from the “tech” side reporting was filled with both sighs-of-relief, and a little smugness of, “See, those naysayers just don’t get tech or social. This proves the IPO market is alive and well!”
That was as of Friday, March 3rd, the day after the IPO’s debut. Then came Monday, and let’s just say – it was different this time.
By Monday the reporting went from, shall we say, exuberance mode – to justification mode. i.e., Don’t panic!!!
If you once again perused not just the broadcast media, but also the printed or online, the commentary was the same: “It’s still up 44% from its IPO price!”
Well, yes, that was true, yet, that was far from accurate as to explain what was taking place. A much better description of what was playing out would be something along these lines:
“Initial investors purchasing shares of Snapchat as it became a public company via the exchange profits now match the company’s core product. e.g., POOF! They’re gone. And it’s appearing to get worse. Much worse.”
By Tuesday anyone who had purchased at the opening bid of $24 would now not only have had any potential profit sent to the ether – everyone, and yes, everyone who stood in line to be first on either Thursday, or Friday just 4 days prior was now losing money on their core investment dollars. And like I said – it was only Monday.
By Friday of that same week? The meme of “Still up 44% from its IPO price of $17!” had fallen silent as that now had been halved. And yes – it gets worse.
Over the next 5 trading days the once again “IPO to prove to the world that not only unicorns were great, but “decacorns” were just fantastic powerhouses of business” began morphing into a creature that far too many dream themselves could do: It became a “teenager.”
In other words, its share price now began using numbers that began with “teen” as in 19, then 18 as its share price continued falling until finally ending the week solidly far, far beneath its triumphant $24-ish close only 5 trading days prior as they say in the investing world – “remaining a teenager” closing at $19 and change.
The issue here is that process has one key attribute: It’s the same pattern we’ve seen before, but now it’s represented in days. To wit:
Back in 2013 I argued that the meme of “its different this time” and more had taken over all sense of reality within “The Valley” (i.e., tech in general), and once the effects produced via the Fed’s ending of QE were in full force the resulting backlash would become prominent for those willing to look. And I pointed to the current songbird of all that was “the Valley” Twitter™ as the canary-in-the-coalmine one needed to watch diligently. The above shows the results of that warning in all too glaring detail.
I made a few more observations (as well as warnings) both before, as well as during that are germane for further context. From September, of 2014, “The Shot Heard Round The Valley World” To wit:
“Once the Fed shuts down the section of QE that has been pumping Billions upon Billions of dollars every month – it’s over for a great many of today’s Wall Street darlings.
Think of it this way: Who is going to fund your next round when they no longer have access to the Fed.’s piggy bank? Let alone pump more money into older start-ups that just haven’t produced any real money (as in net profit,) but have produced nothing more than great new employee digs or benefits?
Tack along side this the culture shock in what will seem near instantaneous with the shunning that will take place of any business resembling the, 3 employee, menial customer base, Zero if not negative profit margin businesses formed with the implicit intent as to be bought up or “acquired” for Billion dollar pay days.
These will be the first to go. That formulation is going way of the now infamous Pets dot-com sock puppet. This will be the first true shock to Silicon Valley culture that hasn’t been seen in many years. And it will be far from the only one.”
That was in 2014 and the reaction to such heresy was like showing the cross to a vampire. Or said differently – I was not going to be on any “list” to speak at any of the hipster inspired tech conferences. The issue? It’s precisely what happened and the great IPO drought began in earnest to the dismay of the entire tech vis-à-vis “The Valley” complex.
Another was made a year later in the article, “Crying Towels”: Silicon Valley’s Next Big Investment Op” Again, to wit:
“Twitter is (again, in my opinion) a real-time microcosm of what’s about to hit the whole Valley. i.e., A real shite storm, and here’s my reasoning…
There are two issues that are very different for both a company as well as the narrative of a whole industry supported by the wings of such a “canary.” And both of these go a little more than unrealized by those not familiar with them. For it hits right at the heart of how a meme or, a presumptive “It’s different here” attitude takes hold when true business principles, disciplines and more get lost on those desperate to not see their world view crushed. But business in its purest form has a way of doing just that – crushing naive or wishful assumptions.”
The idea of publicly arguing the above was met with derision and scorn by many across the mainstream financial/business media, along with those emanating via the tech press with its own cadre of talking-head “Valley” aficionados.
The issue that many were trying to uphold (and pleading for) revolved around the argument that “It’s hard to tell when you’re in a bubble when you are in one.” And followed that up with – “And we don’t believe we’re in one.”
I took and argued the direct opposite view. Here’s how I describe it:
“No. It is easy to spot when you’re in a bubble. The requisite for that spotting is the willingness to actually look. For when fundamental business reasoning are not only circumvented with “fairytale logic” but the argument for even greater tales are needed ever-the-more? You know – it’s a bubble. The real question after that realization is this:
Do you have the wherewithal to overcome the FOMO (fear of missing out) urges that will surely end in tears as the bubble may inflate further? For the argument has moved from anything resembling business, directly to psychological argumentsonly, where emotions are the rule, not the fundamental rules of business. And the resulting frenzy can last far longer than anyone can contemplate. For you’ve moved from fundamental reasoning to pure psychological, emotional, groupthink.
The compounding issue is this: Those who believe they can “get out” when needed before-hand fail to realize it’s that same thinking (an emotional one) that will keep them in, rather than get them out in time. There’s a reason the term “Ride the tiger” persists to this day. Getting on “its back” to begin with has proven over the centuries to be precisely the wrong move.”
To paraphrase from the movie “War Games”: Sometimes, the only winning strategy is not to play. Even if not playing makes you appear (and scorned) as the one who “doesn’t get tech.” On an aside, people forget the public scorn via the investing class for Warren Buffett’s refusal to invest in the tech space during the late 90’s when fortunes were being made overnight. Then to be declared an investing genius by this same cadre when he had no direct exposure to the following dot-com crash.
Today, one can clearly see the “bubble” has indeed popped. The issue for those currently blindsided is that they were (and some still are) clinging far too fiercely to their “fairy tales” of IPO-stock option riches, than a child still wanting to believe in Santa.
Snapchat’s IPO perfectly fits that analogy. The only current unknown is: was that coal that was left behind? Or something else?
To all this I argued the case back in May of last year, “If Everything Is So Great, Where Are The Unicorn IPOs?” Once again, to wit:
“Over the course of the last week it seemed no matter where I turned in the business media one meme was being pushed above all others: It’s still a great time to be a private tech unicorn. Implying, that funding rounds were still “robust.”
What wasn’t said, so I will, is this: It’s a great time to be a private “unicorn” rather, than take the chance and become the poster-child for the IPO apocalypse. For it’s better to be assumed a $BILLION dollar success story rather, than IPO and officially open the books to the market and remove all doubt – that you’re not.”
This was right before Twilio™ announced it was going public and bringing forth its own IPO to the then (and still) barren IPO market. This event (for I have no feelings about the business itself) was used as the foil to put all the naysayers (yours truly in particular) back under the rocks they envisioned we crawled out from as to dance upon our heads with the prancing hooves of the resurgent unicorn IPO market and meme.
Hint: The above chart shows you just how all that “its different this time” was greeted via the new reality of: it surely is – different.
As you can clearly see from the above charts (or “pictures” as they say in “the Valley”) what once took well over a year to develop (as I warned would take time to develop via the initial lingering effects of QE) as witnessed through the Twitter IPO and resulting share price; took the same resulting actions to appear in Twilio’s only a few months.
And now Snap’s appears to have followed the same pattern. The problem? It’s been only 12 trading days. Yes – days.
So now let me end with these questions:
What happens if (or when) Snapchat’s next headline reads: Share prices fall below $17? And where do investors go to get their “lousy T-Shirt?” Or should I say “crying towels?”
© 2017 Mark St.Cyr