Therese Poletti - Yesterday
MARKETWATCH FIRST TAKE
Snap Inc. has never been an investor-friendly company — as long as those investors weren’t its founders, at least — and the parent company of the Snapchat app made that even clearer Thursday.
Related video: Snap's Sales Slump Prompts Social Media Stock Sellof
Amid a major slowdown in its digital advertising business, Snap’s board created a unique (as in we’ve never seen anything like this before) dividend meant to ensure that its founders maintain control of the company, even if they decide to sell their stock. The dividend would be in the form of a 2-for-1 stock split, offering every investor a fresh Class A share for every share they currently own, but it will only occur if shares hit $40 within the next 10 years.
Full earnings coverage: Snap stock plunges 25% as advertising slows down, executives decline to offer forecast
That would seem like an easy target to hit, considering Snap was trading for $40 a share as recently as January. But Snap’s stock has been under enormous pressure since late last year, when Snap blamed changes Apple Inc. had made to the iPhone’s ad tracking, and advertisers hurt by supply-chain woes, for a big disruption in its advertising revenue.
Since that October warning, when Snap’s shares were trading in the vicinity of $75, shares have fallen around 78%. The stock was tumbling sharply again in after-hours trading on Thursday, to around $12, after yet another troubling earnings report in which Snap’s founders couldn’t find it in themselves to even offer a financial forecast.
Since its inception, Snap has been built to please its founders, Chief Executive Evan Spiegel and Chief Technology Officer Bobby Murphy. When it went public in 2017, it offered only nonvoting shares, known as Class A shares, an at-the-time unheard-of move that hasn’t been copied in a major IPO since, and gave Spiegel a “CEO bonus” that amounted to 3% of a company of which he already owned a healthy percentage. The result is that Spiegel and Murphy own a whopping 99.5% voting control of the company.
From 2017: Snap IPO boils down to one question: do you really trust Evan Spiegel?
While other companies that have planned stock splits of late, such as Amazon.com Inc. and Tesla Inc. have pronounced that their moves were meant to help their employees better handle their stock compensation, Snap showed its hand by blatantly stating in a letter Thursday that the move was specifically for their founders’ benefit. It is a way to let the founders continue to donate or sell stock without diluting their voting control and ownership stake — receiving one Class A shares for every supervoting share they currently own gives them a chance at liquidity.
While the two executives have been involved in a lot of philanthropy in recent years, the move seems self-serving. Are the co-founders just making sure they have an easier path to make donations, or are they fiddling while Snap burns?
Clearly, a $40 stock price is a not something Snap is going to see in the near future, so that is probably why no analyst posed a question about the dividend plan on the company’s conference call Thursday. The more immediate problem for investors is the company’s deteriorating ad business, and whether it is symptomatic of the economy or something more problematic at Snap itself.
Snap’s top leaders also should have been focused on Snap’s serious issues, such as the widening quarterly loss and lower-than-expected revenue, or the fact that the company is still unprofitable and doesn’t seem headed toward profitability. Instead, they made sure to protect themselves.
If investors had forgotten how founder-focused Snap is, they got a big reminder on Thursday. And whether those founders are worth it or not, investors have no say in the matter.
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