MorningWord 2/3/17: Snapchat, Amazon, Swamp Things

by Dan February 3, 2017 10:05 am • FREE ACCESS

Snapchat’s public IPO filing last night has the financial world in a bit of a tizzy. There is the expected outrage at the extent of their losses relative to their sales, there has also been a sort of exuberance by some regarding their growth potential beyond what appears to be a niche demographic, while others are giving props to the company’s apparent disregard for conventional Silicon Valley and Wall Street wisdom as it relates to public offerings of much hyped companies. I have read the filing and to be frank, many of the emotions / reactions listed above by the financial press and market participants are not dissimilar to those expressed in the run up to LinkedIn’s 2011 IPO, Facebook’s 2012 IPO, Twitter’s 2013 IPO, and of course Alibaba’s 2014 IPO. Aside from Twitter, all the initial naysayers, including yours truly on occasion, have been proven wrong about what investors are willing to pay for these companies. While most had some dark trading days initially, and LinkedIn, kind of got bailed out from years of GAAP losses in the end, the scarcity value of these sorts of once (twice or thrice) in a generation first mover growth stories is driving a fairly unusual supply demand dynamic for both private and public investors, and the companies this time around are in on the prank.

As Snapchat’s IPO roadshow gets underway in the coming days/weeks in the lead up the IPO it will be interesting to tally the sentiment shifts as investors get to hear the company articulate their plan to return value to shareholders balanced with their ambitious growth initiatives to be carried out under public scrutiny, as opposed to the venture capital community that has bought their schtick hook line and sinker. Shira Ovide from Bloomberg had a very succinct post on what some of the flash points might be for new investors (here).

Moving on to a less controversial stock (sarcasm font needed), Amazon’s Q4 results and expense guidance last night has the stock down about $35 in the pre-market, so far a tad shy of the implied movement, but its early. Again, I am not sure why the guidance on spending should surprise investors, much like Facebook, they told us on their Q3 call in October that 2017 will be an aggressive investment year. Zuck and Bezos are men of their words when it comes to spending investors loot. The main takeaway for me is fairly simple. They are doing exactly what they should be with their core businesses humming, but under constant attack, investing in making their core’s moat bigger and deeper, while investing in what’s next and dazzling their customers. This with both stocks having just nearly kissed their all time highs with combined market capitalizations of three quarter’s of a billion dollars. One could make an easy argument that despite Apple’s $10 billion plus spent on R&D in 2016, its highest spend ever, they have yet to yield a product category since the introduction of the iPad in April 2010, under former CEO Steve Jobs that moves the needle for the company. This despite launching their voice platform Siri in 2011 with the freaking iPhone 4s, they have let company’s like Amazon move ahead of them in what many think is the next major consumer tech platform, Voice. After Amazon’s amazing flop into smartphones, their ability to pull out to such a tremendous lead with their Alexa voice assistant and Echo platform is nothing short of startling, given Apple’s 1 billion iOS installed base.

Lastly, in an interview with the WSJ yesterday, former Goldman Sach’s President Gary Cohn and new White House National Economic Council Director suggested this:

That’s all fine and good with us finance peeps in New York I guess. But I wonder how this affects the populist message? Remember these words (spoken over the images of George Soros, Goldman Sachs CEO Lloyd Blankfein and Janet Yellen) that were part of the now President’s Final Argument for America:

“The establishment has trillions of dollars at stake in this election,”

“For those who control the levers of power in Washington and for the global special interests, they partner with these people that don’t have your good in mind.”

“global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities.”

Obviously, he also spoke of de-regulation on the campaign. And we’ve seen plenty of that the past few days with congress voting to kill the law preventing surface mining debris from spilling into local waterways. And specifically relating to Dodd Frank, congress just rescinded the rule requiring oil and gas companies to disclose payments to foreign governments.

These political decisions have economic ramifications, both good and bad. Near term it makes things easy. Buy banks, buy oil companies, buy mining companies. We’ve also seen some reactions to the populist aspects of the platform, and those seem to affect the dollar, gold, emerging markets, and interest rate expectations. But this is a complicated dance, and there are long term ramifications. If the new administration looks like it’s letting corporate lobbyists write all the laws in congress (as it does so far) it risks losing any goodwill it had from the “drain the swamp” part of the candidacy that resonated with so many. And what’s the reaction if the base starts to see things that way, tariffs on Mexico as a distraction?

As Wall Street luminaries prepare to meet the new President today at the White House, I“ll remind you of former President’s warning to Big Bank CEOs in the throes of the financial crisis:

“My administration is the only thing between you and the pitchforks”.

That was an argument for more regulation following a government bailout. As we get set to unwind a lot of that regulation, remember that half of those pitchforks are already out on the street protesting right now, and the other are the new President’s base, and were out protesting as Tea Partiers a few years back. There’s nothing like Wall Street bankers to bring the country together!