Snapchat: The New York Stock Exchange's next star quarterback or the next investment bust?

Investors trying to assess its potential are like NFL teams trying to assess college quarterbacks. It doesn’t matter how much work they do, it’s basically a crap shoot

James Moore
Friday 03 February 2017 11:07 GMT
Atlanta Falcons Quarterback Matt Ryan: Will Snapchat look like him in two or three years or will it bust out like Johnny Manziel
Atlanta Falcons Quarterback Matt Ryan: Will Snapchat look like him in two or three years or will it bust out like Johnny Manziel (Getty)

With Snapchat - or rather Snap Inc - announcing a multibillion-dollar flotation on the New York Stock Exchange a couple of days before the Super Bowl, it’s worth reflecting on how similar dot coms are to new NFL quarterbacks.

Every year NFL teams pay millions of dollars to college quarterbacks without any real idea of whether they’re going to be any good, just as investors pay billions of dollars to invest in dot-coms, without any real idea of whether they’re going to be any good.

A huge battery of tests and analysis are conducted on both in an attempt to asses their value. And yet, the results prove that despite all this it’s a bit of a lottery in both cases.

There are plenty of high NFL draft picks that, like the Atlanta Falcons’ Matt Ryan (selected third overall) become stars who take their teams to Super Bowls. Just like, say, Facebook has become an investment star, more than trebling its market value since its wildly hyped flotation.

But, equally, there are plenty of busts too. The most obvious recent example in the NFL is former Cleveland Browns QB Johnny Manziel, a first round pick (number 22) in the 2014 draft who flamed out after just two years.

There are lots of dot-com busts too. Anyone remember AOL? Or even Yahoo? Meanwhile, a certain Twitter is frightening the life out of its investors. Having debuted at $26 just over three years ago, the shares rocketed up to $44.90. They’re now worth less than half that, and less than the flotation price too. Critics wonder whether the company will ever make meaningful profits.

Which will Snapchat come to resemble? A shiny Matt Ryan like Facebook (which tried to buy the company a few years ago)? Or a sorry bust like Johnny Manziel? Or possibly Twitter (although it’s too early to count that company out just yet)?

The optimists can point to its regulatory filings that reported 158 million daily users. Their numbers are growing at a dizzying pace. Sales jumped to $404m in 2016 from just $59m in 2015, the sort of growth investors love but have real trouble in finding.

Snap is also alive to the danger of being seen as a one trick pony, describing itself as a camera company that aims to reinvent that particular piece of equipment, while planning to offer more to users of its app than pictures that disappear after ten seconds.

But Facebook is looking at ways to move its tanks on to Snap’s lawn with the help of its Instagram and it has nearly 2 billion active users, more than 10 times the amount Snapchat currently boasts.

It should also be remembered that while teenagers buy stuff, they can also be flighty. It mightn’t be too long before another trendy app attracts their attention. Snap could shoot for their parents, but that could hasten their departure. By the way, the shares Snap is selling to raise $3bn or so? You can’t vote them. Just thought I’d mention that.

Snap is currently heavily loss making, shedding more dollars than it took in revenues in 2016 ($514m in total).

Of course, that’s what dot coms do. Sometimes for years (consider Amazon, for example). The big question is whether Snap can get over the hump, as Facebook has (and how). Or whether it struggles and comes to more closely resemble a Twitter.

In other words, is this NYSE first round draft pick a Matt Ryan. Or is it a Johnny Manziel. Despite the exhaustive work analysts have undertaken, and all the arguments tabled by them, and by people like me, we don’t really know.

In trying to decide whether to bet on a company like this, investors are just like NFL teams trying to decide whether to bet on the latest highly hyped college quarterback (this year look for the names of Deshaun Watson and Mitch Trubisky).

They’re taking part in a very expensive crap shoot. And deep down, they know it.

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