In Snap IPO, New Investors to Get Zero Votes While Founders Keep Control
wsj.com
wsj.com
Alphabet: GOOG (non-voting class C) closed Friday at a 2.8% discount from GOOGL (1x voting class A)
Zillow: Z (non-voting class C) closed Friday at 1.1% discount from ZG (voting class A).
A. On Google finance [1,2], it shows that both GOOG and GOOGL have a market cap of $565B. There is a difference in share price, but also a difference in the number of shares outstanding. Is this correct or a google finance mistake / confusing point?
B. Assuming the discount for the non-voting shares is as you mentioned it, does this mean that shareholders value their vote for google at ~2.5x their vote for Zillow?
C. At 2.8% of Google's market cap, that would mean Google's shareholders value voting rights for google at $15B - a huge amount. What votes does the market see that's worth $15B?
D. It's an often stated point that the stock market and Wall Street focus on short term earnings, at the expense of long term results - and that the management would be more successful in the long term if they didn't have pressure from Wall Street. Does the discount for non-voting shares help determine if this point is true or not?
1. https://www.google.com/finance?q=googl&ei=_qd9WJG8BoKdugSE4o...
2. https://www.google.com/finance?q=goog&ei=Wad9WIn8N4KdugSE4on...
A. Do the multiplication - each share class only accounts for about half the market cap, so presumably Google Finance (or its source) knows that GOOG and GOOGL are the same company and sums them. I don't know why Z/ZG don't have the same property, though.
B. I don't think the per-share spread is particularly illuminating here, because the distribution of outstanding shares between voting and nonvoting is different for each company (if there are relatively few voting shares, then I would expect the per-share spread to be higher proportionally, since each vote is more valuable). I'd be more interested in the total price of all votes - calculated as:
(((price per voting share) - (price per non-voting share)) * (# of voting shares))
Google: $6.8B / $565.7B = 1.2%
Zillow: $23.3M / $6.59B = 0.35%
C. That number should be "only" about 6.8B (per-share premium * number of shares of GOOGL); parent's calculation roughly double-counts the value of the vote (not exactly double since there are more shares of GOOG than GOOGL).
Total control over Google would be immensely valuable - worth much, much more than $7B - so presumably the difference that large investors are willing to pay is based on a probability distribution of how many shares one would expect to need to control to have any influence on the board, weighted by what that influence would actually be worth (presumably fairly little, since Page/Brin/Schmidt hold a controlling majority of votes). The marginal value per vote is also different depending on how many you have - for an average investor, it's probably zero; for the institution trying to muscle its way onto the board, it's probably much more than $26/vote.
D. This reads like a college essay question, and I feel like you have an answer in mind, but it's not immediately obvious to me what the two have to do with each other.
B: I think you're overthinking this a little bit.
C: GOOG and GOOGL have subtle differences between them beyond just the voting rights. For example, GOOG != GOOGL. If you have a contract which obligates you to give someone a share of GOOG, a share of GOOGL does not settle that contract. There are some liquidity-related problems, as there is substantial retail interest in Google and retail traders generally disproportionately have access only to one share class.
One of my favorite examples for this: back in the day, there were two classes of Chipotle, CMG and CMG.B. They were identical in every way except CMG.B had 5x the voting rights. Which traded at a discount to which? Answer: CMG.B routinely traded at a 10% discount. That's either enough to shake one's faith in the efficient markets hypothesis or it's a powerful illustration that in the short run market microstructure matters A LOT.
(I had originally become a shareholder in the A class and started buying B after I was aware of the mispricing. That worked out pretty well. I was far from the only person who realized this, but it was impossible to arbitrage away the difference profitably due to overwhelming short interest in CMG, which meant the cost of borrowing CMG to buy CMG.B and holding them to convergence was untenable. Eventually, some larger institutional buyers just crowded into CMG.B and voted to convert the B shares on a 1:1 basis to the A shares, immediately cutting off their voting power and realizing massive gains.)
Social media platforms seem to be pretty fickle. Of course there are a couple of behemoths such as FB who don't seem to be going anywhere anytime soon, but how does a company like Snap create a moat around their business or keep it defensible long-term?
Please don't take my question to mean that I don't see the product/company as compelling. I don't personally use Snap (when I did a little bit, I enjoyed it), but I guess I just don't understand how to valuate a company like this. Is it mostly branding wherein, somehow someway, they've managed to completely own a certain demographic (here it seems 25 year-olds and under) and they are, therefore, seen as a new medium/platform where brands will be putting a lot of their ad spend?
Forgive the rant, just wondering how people think about this.
I really like snapchat because it is super casual and there is no inherent risk in throwing something goofy together, and no pressure of getting likes or upvotes or anything.
Facebook is where your relatives are, and Instagram is where your entire peer group is. Snapchat is where you can share with who you want (send private snaps to groups, and post stories to the public) while still seeing everyone's content. All while being reasonably confident that your photos/videos aren't being saved (or at least notified when they are, assuming somebody doesnt have an external camera ready).
All of that, plus the ads just feel fair. They exist, appear at the "right" times, and can easily be skipped if content isn't interesting.
I used to think snapchat was a fad. But as its evolved, I've become increasingly confident in their ability to stay relevant.
Edit: I didn't awknowledge your "no like count" point - also spot on. Only visible metric is views to your story, and that isn't public. Pressure to post something "amazing" just doesn't exist like other social networks.
Partially because we're doing long distance at the moment, but a lot of it has to do with how fun the filters are—and they're always changing them, too!
This is what happens to all social media platforms in time. Young people don't want to be where their parents are. Then the parents arrive. Then the young people leave. It's a constant cycle.
I won't dispute your other points, but I wonder, since skipping the ads is so easy, does anyone ever NOT skip them? I know I certainly have never watched one voluntarily. I also know that I'm a bit of an outlier when it comes to that sort of thing, but I really can't think of any good reason why people wouldn't just skip them every time.
* It's simple, stream-lined, and private (to an average user, maybe not the HN crowd) when compared to Facebook or any other social app.
* It appeals strongly to both men and women, which I think is an underrated aspect when it comes to viral tech popularity.
* It can be a more modest form of flirting then Tinder, or a more personable touch then text messaging, often playing a role in relationship building of all kinds.
* It's fun and free.
* It's a fantastic way to keep in touch with old friends, being much easier then a phone call (to the socially anxious among us) and providing a visual connection showing exactly what you are doing in that moment.
Prodigy mIRC Aim MSN Messenger Yahoo Messenger Skype GChat Facebook Messenger Whatsapp Snapchat
Keep in mind Facebook is, what, 12 years old? Popular for 8 or 9 years? It is still a baby itself. Would anyone be shocked if it was a shadow of today's version in another 12 years?
If you want others to invest and take on a financial risk then they should get an equal and fair voting share. If I was the stock exchange I would ban this kind of crap.
Vote your shares, or be an activist shareholder, if the business goes south.
If I were the stock exchange, I would let my customers decide what they were willing to buy rather than dictate to them.
Besides, most investors don't care about voting rights, because they will never own enough shares for their voting rights to matter.
As a buyer, you have no right to dictate what gets sold. There "should" be no imperative that the seller is beholden to.
If the business wants to sell shares with no voting rights, they'll do it. If nobody buys, then they'll change it.
Not quite.
This is why there are tons of regulations (most of them good) around being a publicly traded company.
It has happened in the past.
You say that, and many may agree with you, but the regulators may have a different view point and may take contrary actions.
I don't really want one of these stocks in my index fund, but I'm stuck with Google (who also runs like this) generally being part of such a thing.
Are you sure that giving up voting rights is a good thing for the future success of the company? Why not let individual companies try this idea - maybe it's a good thing?
And if I were to make a bit of a leap, if this is an anti-democratic trend we're witnessing.
If a company goes into any form of bankruptcy, the insider control goes away. That's why Ford Motor Company didn't go bankrupt like GM and Chrysler - the Ford family would lose control. So their financial management is more conservative than the other auto companies.
It's akin to buying shares in The Green Bay Packers, where fans can buy ceremonial shares of the Packers, with absolutely no value.
I don't understand why you would buy a share like this, besides relying on the Greater Fool theory to make money. It's essentially like buying a collectible like a baseball card and hoping that you can sell it to some other fool at a later time.
Shares like this have value only in the bitcoin sense: they're valuable solely because people think they're valuable.
That's not true, you have ownership in the company proportional to the amount of stock you own. Just like any other stock. If the company is bought out or decides to give out dividends in the future you stand to make money. That is why the stock value tends to track the company's ups and downs. Comparing a stock to bitcoin is ludicrous.
I can imagine you arguing that a baseball card is just a worthless piece of cardboard but you could make the same argument about practically anything. What about stock in a sports collectibles company that sells millions of baseball cards, is that somehow better?
Are social networks better investments? What about fine foods, clothing or pretty much anything that makes up most of the economic worth of the world? If you live a strictly minimalistic life then there is nothing beyond the bare essentials that has any intrinsic value.
(TIL the Greater Fool theory -- and while it seems like a bad bet, there are LOTS of stocks on the market that work exactly that way.)
Your listed two conditions leave stock buy backs and mergers as ways money could still be returned to share holders without voting rights.
Snapchat is mostly a texting app. Yes - their value prop is around 'sharing moments' and they do it well. Also - they have other ancilliary offers.
And yes - they are the kings of college aged-students, and the 'cool thing' for now.
But - texting is to some extent a commodity, and 'cool brands' fade. Facebook used to be cool - then they turned into a utility. Twitter was cool, and now it's at utility stage as well.
And - do they really have the capacity to grow to 1.5 billion people? Facebook eventually had 'your parents'. Snapchat will not. Twitter has tons of regular folk. Snapchat probably will not. So there's a limit to their growth.
The question is - can Snapchat exist as a utility when the buzz dies down? Will they anchor themselves as 'the' texting platform, do they have that kind of incumbency?
Snapchat is going nowhere anytime soon, and it's entirely feasible they stay relevant for a long time.
But - the valuation is pretty dam high.
In order to justify a 17B valuation it means you have to produce 17B in profits at todays dollar value. That's a lot of money. It means 1 B in profits in the bank or back to shareholders for 17 years :).
So it's a pretty big valuation to live up to, even if they are fairly successful.
But they are definitely cashing in at exactly the right moment. They hype is at a nadir. They can't get any cooler, though they could break through to other demographics/countries/markets etc which would keep investors happy.