I'm happy for the NYSE that this went well. SNAP has done some pretty large volume so far with no problems.
Interestingly enough, well atleast to someone who cares about the cash equity markets, the NYSE actually did a test run last week to try and simulate the chaos that occurs during any hot IPO.
So now we know that there is atleast some appetite for shares with no controlling interest and no indication of paying out a dividend any time soon. A current market cap of 30 Billion is a pretty darn big accomplishment!
Two big dates in the future to look out for.......
1) July 30 when the first lockup date is over. I'm not sure how many shares come off restriction.
2) May 15 when they do their first earnings report.
I'm interested to see if they try and make people view the company via GAAP accounting(PnL) or non GAAP measures like engagement, monthly users, etc.
They had a pretty large participating contribution (50M shares as I recall) so that is a bunch of money that paid off some folks who might have been skittish.
I was surprised to see as large a bounce as there was. And it has no doubt realigned the world view of a bunch of Snapchat employees[1].
To your last point I can't imagine they are going to talk earnings in a GAAP context unless they are generating lots of free cash flow as Google does.
[1] If you're an employee and reading this and thinking "I'm rich! Quick go buy a Lamborghini!" I caution you to wait until you've not only exercised the shares and paid tax on them, but you have sold the shares and that sale has 'settled' and you have the money in your brokerage account.
Yup, solid advice re: waiting. Generally, I've heard it as "don't do anything drastic with the money for a year". That gives enough time to let the emotions cool down.
And you owe taxes on it, regardless. I heard some sob stories from the brokers at Charles Schwab after Enron went under - energy traders who had borrowed heavily (on margin) against positions that were now worthless. Oy.
Some of the worst horror stories are from people that exercised their options and then waited a year to sell the stock to qualify for long term capital gains. Then the stock subsequently crashed so they owed a massive AMT tax for the difference between strike price and price on exercise and got almost nothing from the actual stock sale.
You are talking past hueving. The huge AMT tax bill could literally follow you around the rest of your life. It is a much higher order problem than blowing money on a car. The last several years I have had 7-figure tax bills due to AMT calculations on options. Good problem, right? Maybe, maybe not. If I had exercised and held, I would be bankrupt. Instead I exercised, sold enough to pay taxes right then, and didn't get hosed when the stock dropped steadily just before every open trading window. I also didn't buy a Lamborghini, but that's beside the point.
A consumption tax solves it. Someone buys a Lamborghini, they pay tax on it. They save the money, they pay nothing. But taxation is power, government can play favorites by using tax laws to reward contributors.
> They had a pretty large participating contribution (50M shares as I recall) so that is a bunch of money that paid off some folks who might have been skittish.
Could you explain what this means a little more? What is a participating contribution in this context? Are these shares employees were able to sell in the IPO?
The s1 listed 50m shares as coming from existing share holders but they did not break it out. Usually that is employees with vested shares and occasionally other investors. Was more common in the dot com IPO's but Zynga did that too as I recall
Its a negotiation that happens with the bank that is taking the company public. They are trading off the 'optics' of a bunch of people selling their stake at the IPO vs value. The lockup period for executive (officers) and non-officers is also negotiated.
The bankers want to strike a balance between employees (especially officers) who have concerns about being whipsawed with the stock price and the perception that they feel the company will grow in value over time so holding the stock is a "good" investment.
It's not an exception to the lockup, they are sold as part of the IPO. It's like taking money off the table in a VC round. Broadly speaking shares can come from three places when they are sold: new, which causes dilution, allocated but not granted, which is where the majority of employee grants come from, and finally vested ownership that is held by individuals. An IPO will have some mix of the latter two almost always. The relative proportion signals how bullish the insiders are to future prospects for the stock.
> So now we know that there is atleast some appetite for shares with no controlling interest and no indication of paying out a dividend any time soon.
Not to mention their $500 million net loss last year. There are cheaper cash incinerators.
> I'm interested to see if they try and make people view the company via GAAP accounting(PnL) or non GAAP measures like engagement, monthly users, etc.
There's no doubt in my mind -- they'll pull some social flim-flam for as long as they can. The whole thing is just nuts. No one's going to buy them now, and their pivot to becoming a "camera company" has yielded an even uglier version of Google Glass.
Man, this surveillance economy bubble feels so close to bursting...
> So now we know that there is atleast some appetite for shares with no controlling interest and no indication of paying out a dividend any time soon. A current market cap of 30 Billion is a pretty darn big accomplishment!
This is really disturbing. I don't know if its an indicator of too much money in the market, or just the fact that the market itself has expanded so much. Why would investors be OK with losing power?
It could be an indicator that a lot of people invest without regard for foundational questions like "does this valuation make sense" or "does my ownership interest grant me any control of the company?"
And I'll be the first to raise my hand on that front. On the face of it, I'm not really interested in owning a stock like this. But I've stopped picking stocks entirely, now I just invest in the stock market through index funds. And there are a lot of people like me -- enough that Vanguard funds own about 5% of just about every public company you can name. People like me are essentially saying, "We don't really care what this company does, how much it costs, or whether its stock can vote, we want to own 5% of it." (And that's just Vanguard -- there are plenty of other passive funds out there, too.)
In an IPO that sells 10 or 15% of the company, these "buy at any price" investors can eat up a pretty big chunk of the available shares. So all it takes is a few investors to say, "yes, we want to buy at this valuation," and the rest of us will blindly follow.
I think the incentives of different investor types should be considered.
If you're a speculative investor and plan to own for <1 month or so, who cares about voting rights.
If you're a long term investor, say >2 years, non-voting shares means the company doesn't have to burn itself for quarterly or annual results.
Activist investors won't like it (but there's not really that many of them).
Will probably work well as long as things are going well for the company. If things go badly, management will need to be very self-aware or the recourse will be a large discount to the share price.
The $SNAP price isn't being driven by index funds. Index funds also aren't about blindly investing ("we don't really care what...") - it's about delegating that trust. For example, SPY is delegating that to a trusted entity (you're trusting that the S&P 500 will remain a meaningful measure of the US stock market).
> "Delegating to a trusted entity" isn't different from "blindly investing"/"buy at any price".
Those are incredibly different things. If I put $5000 in SPY, even if the S&P 500 index contains $FOO today I'm not telling my brokerage firm to "buy and hold $FOO at any price", because that's not how the SPY index works, and it's also not how index fund investing works a strategy either.
In addition, most indices are based on fundamentals like market cap, earnings, and price - either directly or indirectly. Putting money in an index fund is delegating the work of that research to a trusted entity, in exchange for a fee (which is usually bundled into the trading prices).
Actual "blind investing" or "buy at any price" would be someone who trades on individual stocks without doing any systematic research, either directly or through a delegate.
> If I put $5000 in SPY, even if the S&P 500 index contains $FOO today I'm not telling my brokerage firm to "buy and hold $FOO at any price", because that's not how the SPY index works, and it's also not how index fund investing works a strategy either.
Unless you can educate me as to what you mean here, I understand that this is exactly what is happening. As long as $FOO remains in the S&P 500, buying and holding SPY is financially (roughly) equivalent to buying and holding equity in $FOO in proportion.
> Is Snap big enough that indexes tracking the S&P 500 would buy up Snap?
With the risk of stating the obvious... index funds tracking the S&P 500 index buy exactly the 500 stocks that form the index, no more no less (modulo some derivatives that are highly correlated with the index).
So they will buy Snap whenever S&P decides to include Snap in the S&P 500 index. Snap has already surpassed the minimum necessary market cap (~U$5 billion). There are other criteria, but ultimately the inclusions and exclusions are decided by committee [0]. When they do decide change the index, they announce it well ahead of the date when the change is effective.
Vanguard index funds don't participate in IPOs. Their rebalancing occurs on a regular schedule. Constant purchases would undermine the effort to keep fees low.
For the same reason 50% of the US didn't vote in the last election. Or employees don't demand to view board decks.
Most investors are buying as a way to make money off of continued success. They don't want to control the business or make decisions, and even if they did, they don't want to invest enough to make a dent in the normal 1-share-1-vote sort of model. They're looking the company and hooking their accounts to its success. In the public markets, most investors aren't in it for the control, they're in it for the returns.
I think you have an interesting point but I disagree with your analogy of a presidential election. The motivations for voting in a presidential election are not always financial (even though future policies could very well determine your own financial outlook..). I think you're right about investors are in it for the returns but having control can help steer your returns. If everybody thinks the CEO is not increasing shareholder value, you vote to remove said CEO. This is not always positive either as many investors want quick returns and not always have patience for visionaries..
I guess my point was more that at some scale, it feels worthless to vote at all. If I disagree with Snap's CEO, my $500 of stock feels about like my vote in the presidential election. I doubt my input changes the course of anything.
There's a good reason to exert control in both cases, but for many, it feels futile to do so.
Corporate bonds are not a slam dunk win over investing in dual class shares of an IPO.
What kind of corporate bonds specifically? Is it Super safe AAA rated?[1] Or high-yield (aka "junk bonds")?[2]
If an investor wants big returns like he's hoping for Snap's IPO, buying safe AAA bonds isn't going to match that. E.g. Microsoft's 10-year bond only pays 3.34%.[3] That low interest rate barely above Treasury bills is the "price you pay" for safety. If you want to take more risk with a "BB-" corporate bond from Frontier Communications[4], that will pay 11%. That still won't match the potential upside of high flying stocks and the investor has to factor in Frontier's increased potential for defaulting on that debt. (Frontier wouldn't have to pay 11% if all lenders were confident the company would pay it back.) It's not just the bankruptcies to worry about; lots of corporations default on their debts.[5][6]
It's perfectly rational for some investors to calculate a risk-vs-reward and conclude that investing in shares with reduced voting power is better putting money into low-grade corporate bonds.
Well, that's where the institutional smart money is, buying up and depressing yields on high quality corporate debt.
Bond market pricing also benefits large investors. A small guy buying 20-30 bonds will pay higher markup, higher commission and be quoted higher price than a large player with an 8-digit buy order.
In a stock market (outside the dark pools) two players will get quoted roughly the same market price. The larger guy is likely to be at a disadvantage, as exposing a large buy order might lead to supply tightening.
One of the things that I personally believe is that when a company IPOs their priorities become heavily skewed towards profit and earnings, often over a short term period, above all else. And I think that hurts them.
I'm not sure that removing the voting rights of stockholders completely eliminates that pressure—it's probably also rooted in having to be on earnings calls, and the price fluctuations of bad earnings calls, etc.—but remove those voting rights might help to eliminate some of the negative, short-term-profit-seeking pressure.
If it does, it seems reasonable for some investors to want to invest in companies that aren't as worried about voting rights takeovers.
> remove those voting rights might help to eliminate some of the negative, short-term-profit-seeking pressure
For every long-term success story (FB) there's also a story where investors gave the founder super-voting rights and got pretty much nothing in return (ZNGA).
If the company was to run into trouble these restrictions would probably be another reason (in addition to the performance) for large investors to avoid the company. Long term it remains to be seen if this will matter or not but my guess is that as long as it is sailing high many won't care.
Note that Google and Facebook have effectively the same level of founder control, albeit with different implementation details. Google even had to issue a new share class in 2014 so that the company could issue more shares without the founders giving up voting control. Snap's approach seems like a more robust long-term way of telling investors that they don't have a say in things.
Yeah, that was especially shady IMO, and I was surprised back then as well. But I thought that was an exceptional case since it was the only company doing that, and it is so profitable etc. But if companies/founders can get away with this, what stops it from becoming the standard?
Investors who care about returns care about voting power. It's pretty obvious why. The fact that Snap unloaded despite their totally asymmetrical voting structure supports the conclusion that Snap's new "owners" didn't deserve a vote in the first place. Time will tell whether their gamble will pay off.
GAAP vs non GAAP accounting refers to how you calculate PnL, not whether you use things unrelated to accounting to hint that you are growing and might make money in the future. You can definitely use strict GAAP accounting and also brag that users are super duper engaged.
I for one appreciated Greg's note and your follow-up. When you said non gaap initially I thought you explicitly meant the non gaap but still accounting systems that a large, large number of companies out on quarterly earnings (they'll do it right next to it, say " gaap X, non gaap Y ".
So you may see it as pedantic, but I think it was a useful clarification.
Yup i think 'earnings vs user growth numbers' is a great way to put it
My thinking was that 'People worried about money losing companies with huge valuations' is a popular cause of consternation and 'People worried about non-GAAP accounting' is another popular (for some people) cause of consternation.
Gaap(Pnl) vs non-gaap made me suspect you were conflating the two worries, and made me wonder if lots of people might also be confused by what accounting/finance/investment people are generally talking about when they talk about "Non-GAAP measures"
Agree. As a person in accounting/finance/investment, measures like user growth are called KPIs (key performance indicators) and are distinct from NGFMs (non-GAAP financial measures).
Interestingly enough, well atleast to someone who cares about the cash equity markets, the NYSE actually did a test run last week to try and simulate the chaos that occurs during any hot IPO.
So now we know that there is atleast some appetite for shares with no controlling interest and no indication of paying out a dividend any time soon. A current market cap of 30 Billion is a pretty darn big accomplishment!
Two big dates in the future to look out for.......
1) July 30 when the first lockup date is over. I'm not sure how many shares come off restriction.
2) May 15 when they do their first earnings report.
I'm interested to see if they try and make people view the company via GAAP accounting(PnL) or non GAAP measures like engagement, monthly users, etc.