Snap Highlights the Risk of Jumping Into Fresh IPOs

It's been a bumpy ride since Snap (SNAP -0.18%) went public. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss the direction of the business, and how the companies troubles aren't all that unique when you look back at big tech IPOs.

Dylan Lewis: A lot of the comments from management seem to strike that tone with me, too. A couple in particular that really stood out -- one from Spiegel, "We're kind of famous for not giving guidance on product pipeline." We talk about transparency and having shareholders' best interest in mind, there wasn't any guidance anywhere. We didn't really get much in terms of product, we didn't get much in terms of financial guidance. I understand that it's a high-growth business, and it's obviously going to take some time to settle out. I think we were bound to have a big reaction either way to the results, because no one knew what to expect, really. But, it feels a lot like this is a company being run by Spiegel and Murphy that have all the controls and don't have to answer to anybody, and that's because they don't. That's exactly what this is. The way it's all set up, they can do whatever they want.

Evan Niu: Yeah. The whole voting structure, it's very literally saying, "We want your money but not your opinion." [laughs] And that's never good, in any context. Just to touch on what you're saying, his comments on the call had this air of arrogance, like, "Oh, we don't care." Of course, they don't want to give any hints about what they have in the product, because they don't want Facebook to copy them, [laughs] of course, until they release it, and then Facebook will just copy them later. But, yeah, they came off as very smug and arrogant, despite the fact that investors are clearly not impressed. I think heading into the results, the chances of the stock jumping were very remote, because of the valuation. There's so much priced into the valuation at the IPO, which we've talked about on previous shows. The bar is very high already. Any small miss, you're going to get punished for. They missed quite a bit on several fronts. So, it's not really surprising to me that the stock dropped as much as it did, because there's no way it could have lived up to the valuation.

Lewis: In fairness, this is something we've seen time and time again. This happened with Twitter, this happened with Facebook. A lot of expectations coming out of the IPO, and then the next morning wake-up where you're like, "Oh, we need to run a real business here that's making money and put up solid numbers quarter to quarter." I think this is part of the reason why, even if you do think Snap is a long-term stock that you want to own, you want to buy -- or really, for that matter, any recently public stock -- it might make sense to wait a few quarters and see how the numbers shake out first. Because management knows a lot more than you do when it's time to go public, in terms of the trajectory of the business. And also, when you're pre-monetization the way that Snap was, you're not exactly sure what those revenue streams are going to look like, or what the final business is really going to become.

Niu: Exactly. That supports my theory that they're just trying to cash out. Some people argue that they went public prematurely relative to -- usually, you want to have some more solid financial numbers before you go public. They were just now starting to grow the ad business, which is why the growth rate in the first quarter was so huge, because they're coming off such a tiny base. So, there was some concern, like, why are they going public now, versus waiting until they have some better results in their track record? Which, of course, makes it better to justify to investors. But, I think the whole thing is, they just want to cash out as soon as they can, and get rich.

Lewis: Yeah. In some ways, I can't blame them, right?