Tags Financial MarketsMoney and Banking
Earlier this month, the 2nd of March, there was quite a fuss on Wall Street. The long-anticipated IPO of Snap Inc. (also known as Snapchat) was imminent. The CEO and founder Evan Spiegel rang the bell at the NYSE together with his co-founder and CTO Bobby Murphy.
Snap Inc. shares opened at $17 and by the time the markets closed the price had risen to $25 resulting in a market cap of $29 billion. It's not very hard to see this really is a remarkable performance for a (tech) company that is built around just a single product, Snapchat. Although Snap Inc. calls itself a camera company, those who buy stock in Snap Inc. likely see themselves as simply investing in Snapchat.1
The fuss around Snap Inc.'s IPO is not merely due to the share price and the subsequent valuation, but also for the characteristics and details of Snap Inc. itself. For example, it is doubtful and unclear if Snapchat is even profitable, and Snapchat is consistently losing daily active users, the key performance indicator amongst peers. Snapchat is under heavy fire, especially from Facebook with Messenger and Instagram, which is cloning almost every feature that makes (or made) Snapchat unique. These striking points make such a valuation as stated above arguably both unwise and even shocking.
The Snap Inc. IPO reminds us of the Netscape IPO in 1995. Netscape was the first real "DotCom" business that was valued at a high — unanticipated — price, setting fire to a real IPO-blaze. When their first trading day closed, shares traded for $58.25, an 108% increase in comparison with their IPO opening price. All of this without being profitable or being a good business by accounting standards.2
The parallels between Netscape and Snap Inc. aren't really hard to miss. Netscape was without any doubt a pioneer in the scene, as Garrison and Callahan state in their article “Does Austrian Business Cycle help explain Dot-Com Boom And Bust?”:
The Netscape IPO served as a highly visible symbol for the potential of the Internet, and the potential investor profits that might be gained by arriving at the dot-com party early.
This is exactly the spirit of Snap Inc.’s IPO, an opening of a new chapter in online-advertising and video communication between people, brands, etc. Even though Snap Inc. is not really the pioneer that Netscape was, it is reality that Snapchat is being posited as a revolutionizing company with millions of users, surfing on the out-of-the-box ideas where Snapchat is built upon. But are those ideas worth billions of dollars? Is the bubble inflating? Or to put it in Austrian terms, are we seeing unsustainable investments?
As Callahan and Garrison put it:
The IPO is significant because every bubble needs a story, which early investors can tell to later ones to justify rising asset prices.
The story of Snap Inc.’s IPO and other Tech IPO's such as Twitter’s, is clear: the revolutionizing era is here, it's time to get on the "app train." A business doesn't even need to be profitable, it just needs to fit in the "app narrative."
The Austrian business cycle theory explains one of the most important causes of such a bubble, the creation of credit by central banks. With the money presses at maximum capacity, the abundant credit doesn't know where to flow. We see bubbles everywhere, e.g., the housing prices reaching new heights and now, a large one in the "Tech-startup world." The rapid growth of the tech-companies, is being best explained by the Nasdaq Composite:
(Source: Yahoo! Finance)
The worrying comparison with the 2000-peak should be writing on the wall, a warning that the policies like those of the Fed aren't really healing wounds — they're simply creating another bubble.
The very low-rate policies of the Fed have been delivering easy credit, indirectly, to a lot of companies such as Snap Inc., and directly, to the investors of those companies. Also, the deposit interest rates force households to invest their savings into shares or other investing options. The households who are normally not into investing in stocks, dare to buy some shares of their favorite company, so why not the stocks of Snap Inc.? This is just one example of the distortion caused by a radical, impactful, and disrupting inflating policy. The forming and inflation of a bubble is inevitable, with mere thanks to today's central-bank policies.