Global Investing: 9 reasons why the Snap IPO won't click with investors

Is Snap the next Facebook? Fat chance. Facebook's revenue per user is $20; Snap's revenue per user is $2.

Snap, the parent of the Snapchat messaging service whose gimmicks (photos, texts and video that disappear) have electrified the global digital village, has filed for the most high-profile social media IPO in New York since Facebook in 2012. However, even as its investment bankers do their best to "hype" the prospects of the Snap IPO in global markets, I advise UAE investors to avoid the new issue deal like the plague. Why?
One, Snap has been in existence for the past five years but has not achieved break-even. Snap cost $516 million on revenue of $404 though I concede revenue growth will be at least 100 per cent in 2017. The S-1 states that Snap may never achieve profitability. This "Amazon model" worked brilliantly for Jeff Bezos but will not work for a new generation of institutional investors deeply sceptical about the prospect of perpetual profitless growth.
Two, the Wall Street equity underwriting grapevine tells me that the Snap IPO will be valued at $20$-24 billion when it breaks syndicate. Granted, this is a hyper-growth, "concept" social network business, but 50 times trailing revenues is an insane valuation metric. This is not investing. This is Las Vegas-, Monte Carlo- and Macau-style temples to Lady Luck - or the "greater fool theory" in real time. Snap is not for me, even if the shares will sizzle in the secondary market, at least on the first day!
Three, Snap is a $3 billion offering and its corporate insiders, led by CEO/founder Even Spiegel, will control the fate of the company forever due to a Google-style dual voting share structure that makes a mockery of corporate governance norms. As a minority shareholders, my only choice is not to bid for the deal, even if its bankers tout it as the hottest Internet deal since Twitter went public in November 2014. In fact, unlike Twitter, Snap is more a teenage fad, not even a credible social-networking platform.
Four, user growth is a critical data point for a social media IPO. Unfortunately, Snap's user growth is slowing even if Spiegel insists the more relevant metric is engagement time, not user growth. Poppycock. When Twitter's user growth slowed, the shares lost 50 per cent of their value on the Nasdaq. Will Snap face a Twitter-style meltdown after its IPO on Wall Street? Yes, almost certainly, it will.
Five, I see no reason why Facebook cannot devastate Snap's business model by simply incorporating its messaging gimmicks in its service. In fact, Instagram Stories could be a credible explanation for Snap's dramatic recent slowdown in user growth in the past six months. It is mission-critical that investors not confuse the sizzle (the hottest young demographics on the Internet) with the steak (a business model that monetises user growth). My conclusion is that Snap (like Twitter but unlike Facebook) cannot easily monetise its users. Like Twitter, Snap is a loss-making niche business that a strategic buyer will be loath to buy at a stratospheric valuation. The Snap IPO will have to lose 80 per cent of its market value before, say, Alphabet (Google's parent) makes a bid.
Six, the private market value of Snap is $17 billion even before the planned IPO in March. Note that company insiders, venture capitalists, strategic pre-IPO investors accumulated their shares at peanut valuations and made the big money long before the company offers shares to the public. So who is the greater fool in this greater fool Ponzi scheme? Take a guess. As Papa Hemingway wrote, ask not for whom the bell tolls. Its tolls for you, homeboy!
Seven, tangible book value per share is 0.92. True, this is not an accurate valuation metric for a social network, Yet Twitter could well trade at 50 times tangible book value after its IPO, a metric that is an infallible formula to hemorrhage money in my experience as a seasoned (and sometimes bloodied) investor in Wall Street tech IPO's. This is not to deny that many gullible souls will buy the hype that Snap is the "next Facebook" and Miranda Kerr is Sheryl Sandberg in drag.
Eight, what is fair value for Snap if it generates $1 billion in sales in 2017 (big if). Twitter trades at six times sales. So Snap should be valued at $6 billion, not $20-$24 billion, as the IPO implies.
Nine, is Snap the next Facebook? Fat chance. Facebook's revenue per user is $20; Snap's revenue per user is $2.
The writer is a global equities strategist and fund manager.