Business World

Friday 18 August 2017

Lottery of Snapchat brings back memories of the dotcom bubble

 

There are times when investors support companies which are loss-making but are considered to have strong future growth prospects. (stock photo)
There are times when investors support companies which are loss-making but are considered to have strong future growth prospects. (stock photo)

David Holohan

Stock market investors can be fickle. There are times when they support companies which have tried and tested business models and which generate profits and dividends each year. There are times when investors support companies which are loss-making but are considered to have strong future growth prospects.

The latter type of company can also be likened to owning a lottery ticket. Sometimes buying lottery tickets pays off but in most cases, they do not.

The recent initial public offering (IPO) of Snap Inc, the owner of the Snapchat software app, is reminiscent of Nasdaq market listings two decades ago in the run up to the dotcom bubble.

Set up by former students of Stanford University in 2011, the five-year-old company had amassed almost 160 million daily active users by the end of 2016 - a significant increase on the 46 million users that the company had in 2014.

Snapchat targets users aged between 13- and 34-years-old: millennials that are adept at using social media - but not paying for it, it must be noted.

Therein lies the problem - Snap Inc is losing money at a rapid rate. Analysts covering the company are forecasting GAAP net losses in the region of $1bn each year for the next several years before the company turns profitable sometime after 2020.

Snap Inc arrived to the stock market at the beginning of March to great fanfare. Its shares moved higher by almost 60pc during the first two days of trading, giving the loss-making company a market capitalisation of more than $30bn.

In the subsequent weeks, the shares declined by 27pc - highlighting the volatility which investors can expect from the company.

Ultimately, it is very difficult to build an investment case for a company that is losing such substantial amounts of money on a continuing basis while also operating in the fast-moving, ever-changing technology industry.

By comparison, there are attractive companies that have delivered significant returns for shareholders over many years and can be expected to do so in the future as well.

DCC is one such company. It's a sales, marketing, distribution, and business services group comprised of four divisions: energy, healthcare, technology and environmental. The company has a market capitalisation of £6bn.

At first glance, investors could be forgiven for thinking that DCC's operations lack the panache of a typical high-growth company but DCC is among the most successful companies in the world at doing what it does.

DCC has an extraordinarily-strong record of accomplishment that would be the envy of any publicly listed company.

Over the past 22 years, DCC has grown its operating profit from £17m in 1994 to £301m in 2016. Its dividend per share has increased from 5p to 97p over the same period.

Since 2010, shares of DCC have increased in value by about 400pc. The success that the group has experienced is repeatable and there is a clear line of sight that could see the stock double once again in another five or six years.

For investors, the best way to grow the value of a portfolio is to find companies with similar characteristics to DCC and take a long-term approach - letting profitability and dividends compound over time.

The alternative is to purchase a lottery ticket such as Snapchat Inc, hoping for the best - but more than likely, this will lead to disappointment.

David Holohan is chief investment officer with Merrion Capital

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