Snapchat CEO Evan Spiegel made candid comments about the tech sector and Facebook in particular in a Nov. 2013 email to a Sony executive who is a Snapchat board member, as revealed in the huge Sony hack.
The mobile messaging company has already rejected a $US3 billion offer from Facebook and is reportedly raising money at a $US10 billion valuation.
Although Spiegel’s comments are 13 months old, the stocks he mention have only continued to rise while the Fed has kept rates low, so there’s no reason to think his opinion has changed. Here’s what he said:
[M]y view of the market is as follows —
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance – especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users – a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. “If this company attracts just 5% of users that FB has, it will be HUGE” – fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease – compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.
Spiegel, then-23, also commented on how his mobile messaging app fits into this environment:
THAT SAID, we are still in very early days in mobile application market. I remember growing up wishing I had been a part of PC revolution – and I feel very fortunate to have the opportunity to watch smartphones take off. Snapchat has become one of the top 5 mobile phone brands with Facebook, Twitter, YouTube, and Instagram.
For Snapchat to capitalise on market conditions in next 3 years, it is imperative that we become a revenue-generating company. That will allow us to attract the best talent and prosper despite extreme scrutiny on traditional social media that will have failed to deliver on $US$US$US dreams. Team is working overtime to drive revenue and innovate on core product – we have a solid 3-year roadmap that we intend to follow.
As a profitable growth company with a focus on mobile we will not suffer from opportunities to raise capital at outsized valuations despite market conditions. Strategically it is important for us to keep expectations low with an understanding that Snapchat may be valued on revenues going forward and that $US800mm valuation for a two year old company is remarkable and already more than enough to grow into. With 13-15 months of runway extended by minimally successful revenue generation activities I think we are positioned to capture the mobile communication market.
I disagree wholeheartedly with the notion that mobile will be forever fragmented – we are the only differentiated messaging service in the United States and we will continue to provide a unique and innovative product experience. Snapchat is not valuable in the long-term because it is used by teens or because it is a threat to Facebook. It is valuable because it has fundamentally changed the nature of digital communication in <2 years and will continue to do so for the life of the Company (may it be long and prosperous).
Our focus in the immediate term is revenue generation, growth and product development.
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