The Problem with Snapchat

Snapchat

Market momentum is Green, BUT I’m moving to cash. There was something very unusual about today’s tech selloff: The sheer amount of selling in FAANG stocks ahead of next week’s earnings report. The dismal numbers out of SNAP today appeared to create panic selling among fund managers. META shares were off more than 7.6% today. It takes A LOT of selling to produce that sort of result.

I have never cared for Snapchat (SNAP). Not because I think it’s a bogus company that poisons the minds of Americans while distracting us from real issues and compromising the short-term attention spans of 95% of humans with flashy graphics and addictive technology that will doom us to extinction with enough time… 

No, I don’t like them because they’ve never played by the rules. Back in 2017, when Snapchat went public, it seeped with secrecy. At the time, I’d never seen a worse S-1 filing, a document that companies must provide around finances and strategy to regulators before they go public. 

That filing included the words “sexting, party goat, and selfie” in it -one reason I couldn’t take it seriously. It also signaled to me that it would struggle to be profitable in the future. 

Tiered Shareholders of Snapchat

Even worse – the company’s founders demanded a multi-tier voting platform across various stock classes. Effectively, the founders received the bulk of the A shares – handing them a monopoly on power. Shares you purchase today on the market for Snapchat are C-class shares. Your voice doesn’t count. 

This trend really took off under Facebook and co-founder Mark Zuckerberg. This tiered shareholder strategy removes the accountability of the public markets by effectively preventing an activist investor from ever mounting a proxy challenge. How can you vote to change the board of directors when your shares have… NO VOTING POWER.

At the time of Snapchat’s IPO, I interviewed dozens of pension funds, including the largest in the California Public Employees’ Retirement System or CalPERS. The pension fund’s investment director said this of the voting structure: “We view the idea of management for life, with no votes for the ‘electorate’ as governance fit for a banana republic.”

Snapchat founders upset so many people that even the International Brotherhood of Teamsters joined a protest alongside various anti-union investment managers. That’s like finding a way to be condemned by all 100 U.S. Senators on the floor of Congress – uniting people who can’t agree on anything around ONE SINGLE THING.

A Lack of Accountability

The co-founders are entrenched in power positions for life. But anyone who invests in index funds – and many pension funds do – can’t do anything about it and are forced to own the stock by default. SNAP shares are part of the S&P 500 ETF (SPY). In fact, 129 ETFs hold SNAP stock. And there’s no ability to change leadership or push for strategy changes. 

So, when shares plunge nearly 40% as they did on Friday, no one has any ability to air their grievances to the board. It was clear that the U.S. economy was heading into a recession. It was clear that Snapchat is consistently struggling to maintain a profit. And it was clear that advertising dollars were drying up. And all investors – whether active or passive (via ETFs) can do – is stay the course. 

Snapchat is a hostage taker for other people’s money. I said back in 2017 that the stock was worth no more than $7. It hit that level in 2018 under economic circumstances worse than this. And it will likely hit $7 again… or worse. Buyer beware.

Snapchat’s Signal

I’m not sure what happened today, but it was clear that money managers are taking profits on our short-term rally. Based on Snapchat’s dismal numbers today, I think that managers are happy to walk away ahead of next week. The SNAP numbers were downright bad. 

This was a stock that Jim Cramer recommended at $59 per share. In mid-May, it was back at $24. Today, it hit $10. But there’s no accountability. That’s how you end up with wishy-washy public statements like this out of the CEO:

“We are evolving our business and strategy to reaccelerate revenue growth, including innovating on our products, investing heavily in our direct response advertising business, and cultivating new sources of revenue to help diversify our top-line growth…While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition” Spiegel.

Nothing in this statement answers the most important question… “HOW?!” Revenue largely comes from advertising… and the problems are mounting.

Of course. It’s not just one company facing these challenges. Advertising stocks have been in freefall all 2022. They consistently appear on the 52-week low roster that I analyze every morning. I’m not sure how companies like Meta Platforms (META) – which used to be Facebook – Alphabet (GOOG) fare as their earnings approach. 

Today, we witnessed $250 billion in outflows from Alphabet, Meta, Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL). Say it with me: A Quarter of a Trillion Dollars.

It appears that no one wants to own any of these companies ahead of their earnings announcements. It’s going to be a tough week next week. I’m happy to get out of the way ahead of time. I can always ride momentum after an earnings report. 

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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