июл 12, 2017

Snap and Blue Apron Continue to Plunge

Snap Inc. and Blue Apron Holdings Inc. have swiftly gone from two of the year's most anticipated IPOs to poster children for companies whose rich private valuations haven't withstood the scrutiny of public markets.


Investors' urgency to grab a piece of what could be the next big thing -- a bet on future innovation -- has helped drive up valuations of unprofitable private companies facing fierce competition. Public market investors are showing a reluctance to reward rich market values without proof of financial health and future growth. That includes Snap and Blue Apron, both of which are trading below their initial public offering price.

"Investors who haven't slept through Snap and Blue Apron will actually think about valuation, not dream about it," said Erik Gordon, professor at University of Michigan's Ross School of Business.

While there is more to running a successful company than market value, negative sentiment can erode customer relationships, employee morale and the ability to raise more money. It's a cautionary tale for young companies taking private funding and a potentially ominous harbinger for the private tech giants yet to list: Overshoot what public investors can stomach and risk your stock taking a beating.

Snap, the maker of the disappearing-photo application Snapchat, fell below its $17-a-share IPO price for the first time Monday and continued its decline Tuesday to as low as $15.44. Its market capitalization of about $18.2 billion stands in disappointing contrast to the high-end valuation target of $40 billion described by a person familiar with the matter in October.

Airbnb, Dropbox

Snap was one of the biggest unicorns -- private companies valued at more than $1 billion. Having amassed sometimes billions of dollars at ever-increasing valuations, the likes of the $31 billion travel rental platform Airbnb Inc. or the $10 billion cloud storage company Dropbox Inc. may have to give investors an exit opportunity. That will be a true test at whether those valuations stand.

Fear of underperforming on lofty private valuations has already gummed up the exit pipeline. Pre-IPO companies that don't need the cash may hold off listing in the hope they can grow into their private market value, Gordon said.

A near-term IPO seems even less likely for others, namely the biggest of the unicorns, Uber Technologies Inc. The $69 billion private company is currently without a chief executive officer after founder Travis Kalanick resigned amid scandals involving, among other allegations, sex discrimination and harassment claims against the ride-hailing company.

Dick Costolo, Twitter Inc.'s former chief executive officer, said in a Bloomberg TV interview that he expects the valuation declines at the IPO stage to persist in the next two years. He predicts "lots of money in the private markets chasing few deals" and driving up prices.

"When these things finally see the light of day in the retail markets, it sort of -- probably rightly -- turns out to be the case that these are not worth as much as their last private rounds were," said Costolo, now head of his fitness startup Chorus.

For Snap, much of the pressure has been external. Since raising $3.9 billion in its March IPO, the Venice, California-based company hasn't been able to shake investor questions about its growth and worries over competition from Facebook Inc.'s Instagram app. By June, Snap was the most-shorted new U.S. technology stock of the year.

Snap Downgraded

Compounding the uncertainty, Snap doesn't issue forward-looking guidance, leaving investors and analysts guessing. On Tuesday, Snap's stock was downgraded from a buy to the equivalent of hold by analyst Brian Nowak at Morgan Stanley, the lead underwriter for the company's IPO.

Nowak slashed his share price target to $16 from $28 -- a 43 percent cut. The rationale? The company's ad products are taking longer to improve and evolve than previously expected, he said, prompting him to cut his 2017-2018 revenue forecasts by 7 percent to 13 percent.

"We have been wrong about Snap's ability to innovate and improve its ad product this year," Nowak wrote in a note to clients Tuesday. "Instagram has become more aggressive in competing for Snap's ad dollars."

Blue Apron is confronting its own rival colossus. Three days before the meal-kit delivery company's IPO, Amazon.com Inc. concussed the entire food industry with an agreement to buy Whole Foods Market Inc. for $13.7 billion.

Aspirational Valuation

The company's aspirational $3.2 billion valuation would have been richer than the average of U.S.-listed e-commerce companies. Emphasizing its web-based service, it angled to be valued as a high-growth tech company rather than as a grocery delivery service, people familiar with the matter have said.

Management's spiel fell flat with public market investors. The New York-based company ended up selling its shares for $10 on June 28, less than two-thirds of its initial target price and the second-biggest cut for a U.S. IPO in five years. Raising $300 million, Blue Apron clocked a market value of about $1.9 billion, less than its $2 billion valuation in a 2015 private funding round when it had less than half the net sales it did last year.

'Less Than Attractive'

The pain doesn't end there for Blue Apron; its disappointing IPO take may force it to seek more cash soon. Shares slipped almost 29 percent below its IPO price in just nine trading days, to as low as $7.08 Tuesday.

One analyst expects Blue Apron to fall further. Chuck Cerankosky of Northcoast Research was the first to rate the stock, giving it a $2 price target with a sell rating, citing the company's "severe cost challenges as well as a competitive set that is broadening and intensifying."

"It is important to note that this is not a technology company just because orders are received digitally," he wrote in a note to clients Tuesday. "We have no doubt that Blue Apron produces a fine product for consumers. For investors however, we think the stock is less than attractive."

Bloomberg Technology

by  Alex Barinka