Market madness (again)
You could be forgiven for wondering what was going on currently. We have a reality TV star as the US President, a man who dictates policy through Twitter like a tipsy teenager.
Equity markets have surged to new highs and more people are trading them than ever before. Wages are stagnant, asset prices are bloated, debt is everywhere and people have never been more miserable. Perhaps I should try to be more upbeat about things.
I firmly believe that recent highs for US share markets are nothing more than the US being seen as the lesser of two evils. US markets are not cheap on a historic basis (average trailing price/earnings ratio of 25 times) and only look 'safe' compared to the mess that is Europe. In fact, the kindest thing you can say about the markets is that they are not as expensive as they were in 1929 and 2000.
Should France, Italy or The Netherlands decide to leave the European experiment, it would clearly put Germany in a very awkward position. US markets are assuming all Trump promises on tax and the removal of red tape will come to fruition. They won't, but that's a story for another day.
Many recent advances and changes in the way we live our lives in 2017 are of course fantastic. We are able to communicate more efficiently than ever before, (if we could just remember to actually speak to each other now and again). Having said that, we are unlikely to return to boxy black and white TV's anytime soon and phones won't ever have tightly wound cords linking them to a wall socket again. Booking a flight no longer takes a drive to the travel agent, booking a table for dinner can be done in seconds and transferring money is simple and fast. Wonderful.
Some things won't change however. Overpriced, over hyped and desperately 'fashionable' stocks will come to market. They will make their founders hugely rich. The shares will rise and then fall. It will make lots of people look very silly.
The only problem with fashion is that it changes so quickly, and never more so than today. What looks like a great buy in rosy times can quickly look like a moment of madness once storm clouds start to gather for the economy. Let’s take a look at Snap Inc, the largest and most anticipated (by who, we are not sure) IPO since 2014.
The young founders of Snap turned down an offer of $3bn from Facebook a few years back and at the time, many could barely believe their chutzpah and arrogance. At the market close last week, the company was worth just under $23bn. Smart move boys! They even kept their voting rights to the company, the shares they floated (sold) did not have the same rights as the ones they retained - it's brilliant really. Each is worth $5bn today. Impressive stuff indeed.
The IPO prospectus describes the business as 'a camera company'. This is not really true. Snap is a messaging application for smartphones - you send someone a picture or video, and it deletes itself shortly after the recipient has read it. They also allow users to manipulate pictures with various graphics. That's it in a nutshell. The shares floated at $17 and rose to $27 a few days later.
Facebook has 4bn users and a worth of $400bn. Snap has 158m users and a current worth of $23bn. Facebook users spend 50 minutes a day using the site, Snap users spend half that amount. Facebook made $8.6bn in advertising revenue last quarter, Snap made $165m. However, and this is the most important number, Facebook made $20 advertising revenue per user, Snap pulled in just $2.15 per user.
Could Snap grow and attract a mainstream middle-aged audience? Possibly, but it would be costly and risky and the prospectus suggests it won't even try.
Growth in China will be difficult as it is doubtful whether China would be happy with Snap's delete function because it would be so hard to police. Instagram recently launched a rival to Snap, called Stories. It signed up 100m users within 4 months, Snap has 158m in total remember.
Facebook and Google are both bigger and less risky, and both trade on far cheaper valuations. The founders, Evan Spiegel and Bobby Murphy, were very brave to turn down that $3bn offer in 2012, but even smart, brave billionaires have been known to push their luck.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.