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Financial Review of Snap Inc. in Its Market

By:   •  May 12, 2018  •  Research Paper  •  3,201 Words (13 Pages)  •  96 Views

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FIN 335-Final Project

Snap, Inc. (SNAP) is the parent company for the app known as Snapchat. Snapchat has quickly become one of the major social media platforms in the world. Its main competitors are Facebook (FB) and Twitter (TWTR). Snap, Inc is a little different from other social media tech companies in that it is based in Los Angeles, Ca while most try to stay in the San Fransisco tech environment (Fiegerman, S., 2017). Its CEO and cofounder Evan Spiegel does not have much to do with interviews and the company does not attend product demo events like most competitors (Fiegerman, S., 2017). You could say they like to live in their own little world and separate themselves from the traditional environment. Snap, Inc. just started trying to make money around two and a half years ago (Fiegerman, S., 2017). It went public on March 02, 2017, at $24 dollars a share (Fiegerman, S., 2017). Like any social media tech company, it has not started strong. Eight months after its initial public offering, it is now sitting at around $12 per share (Fiegerman, S., 2017). This is a 50% decrease. All major social media tech companies have seen this rocky start, so there may be hope for Snap, Inc yet (Fiegerman, S., 2017).

There are many types of stock exchanges that Snap, Inc could have chosen to use to sell their stock. Snap, Inc sells their stock on the New York Stock Exchange (NYSE). The NYSE is an auction-based stock exchange, meaning that specialists are physically present on a trading floor auctioning off stocks (Harper, D., 2017). The NYSE is also available in a digital capacity, meaning that people can buy, sell, and trade stock completely online if they want to (Harper, D., 2017). The NYSE offers a wide array of securities including stocks, bonds, mutual funds and ETF's, and more (Fiegerman, S., 2017). The NYSE is the largest stock exchange and holds a certain level of credibility with investors because companies who list their securities with the NYSE must first meet certain requirements (Harper, D., 2017). To remain a listed company with the NYSE a company must maintain a market capitalization of over $40 million and also have a

share price of at least $4 (Harper, D., 2017). It also has other criteria that companies must follow; for example, a company must get shareholder approval to give out stock options and bonuses and a percentage of company's board of directors must be independent (Harper, D., 2017). Companies must also meet minimum income criteria. All of these requirements can make it harder to break into the NYSE.

Another market exchange that Snap, Inc could have chosen to list their company's stock with is NASDAQ. Unlike the NYSE, this exchange takes place one hundred percent online. You can think of it more as a communications network between buyers and sellers. NASDAQ offers a variety of commodities as well as what companies can list with them. NASDAQ is well known for holding larger tech companies like Microsoft and Apple, but more than just tech companies can list on NASDAQ. NASDAQ is significantly easier than the NYSE to enter because the market capitalization and income requirements are much lower.

The NYSE has had a +15.68% change in the past year while NASDAQ has had a +28.91% change in the past year. The Price to earnings ratio for the NYSE is 24.7 and for NASDAQ it is 32.2. Both have had good years with strong performance.

There are numerous external factors that can cause financial markets to move in a certain direction. Economic environments, such as boom and bust cycles, have differing affects on market tendencies. Economic environments are shaped by their inflation rates, interest rates, Gross Domestic Product (GDP), unemployment, etc. Economic environments are also shaped by social and political policy because policy changes in turn affect these economic factors. It is not just the market as a whole that is influenced by different economic environments, but also specific financial instruments, such as stocks, bonds, and mutual funds.

Boom and bust cycles are the repeated expansion and contraction of certain economic variables which cause cycles of strong economic growth known as a boom cycle and weak economic growth known as a bust cycle (Pettinger, T., 2012). When economic growth becomes more rapid, with rising GDP, inflation rates, and lower unemployment; that means the economy is in a boom cycle (Pettinger, T., 2012). In a boom cycle, household wealth becomes more abundant (Pettinger, T., 2012). As a result, more households have extra income to invest (Pettinger, T., 2012). Typically in a boom cycle, interest rates decrease which again increase borrowing and investing practices (Pettinger, T., 2012). When economic growth slows with lowering GDP, inflation rates, and rising unemployment; that means the economy is in a bust cycle (Pettinger, T., 2012). Unemployment rises and causes job loss, meaning households typically no longer have extra income to spend on investing (Pettinger, T., 2012). Interest rates also rise during a bust cycle to cover costs and banks losses (Pettinger, T., 2012). This discourages borrowing and investing (Pettinger, T., 2012).

In typical boom and bust cycles, a boom cycle would have economic growth and inflation above the long run trend rate (Pettinger, T., 2012). You can think of a typical boom and bust

cycle as the 1980's post war economy in the UK (Pettinger, T., 2012). The target economic growth and inflation was 2.5%, but on all accounts the numbers were much higher than that (Pettinger, T., 2012). The economy was growing at a rate the country could not keep up with. So much additional spending had driven supply up so much further than demand for products and services that inflation was rising at a much higher rate than expected (Pettinger, T., 2012). This is what a typical boom cycle would look like. To give an example that may contradict that model is the 2008 recession we saw in the U.S.A (Pettinger, T., 2012). By accounts of the numbers, economic growth and inflation were very close to the target numbers (Pettinger, T., 2012). The problem with the 2008 recession instead laid on the increased lending by banks (Pettinger, T., 2012). Banks were doing very well in the boom cycle, but when the credit crunch came and people were defaulting on so many loans, the bust cycle came on very rapidly despite the on target numbers (Pettinger, T., 2012).

The economic factors that affect the stock market are caused by changes in social and political policy, specifically monetary and fiscal policy (Pettinger, T., 2012). Loose monetary policy can mean that real interest rates are substantially lower than expected, causing the rapid economic growth (Pettinger, T., 2012). Loose fiscal policy can also cause rapid economic growth, such as a tax cut when the numbers are already on target (Pettinger, T., 2012). This can cause real inflation and growth numbers to be higher than expected (Pettinger, T., 2012). Interest rates and bank lending are a contributing factor as we saw in the 2008 recession (Pettinger, T., 2012).

Differing economic environments affect the market as a whole, but also affect securities on an individual basis. During times of boom cycles, stock and commodities react positively to the growth (Pettinger, T., 2012). Mutual Funds have larger inflows, typically meaning positive

results (Pettinger, T., 2012). Bonds yields go down during this time (Pettinger, T., 2012). Prices of stocks rise typically and investors are more willing to take on risk and invest in newly listed companies (Pettinger, T., 2012). During a bust cycle, the opposite occurs. Stocks and commodities react negatively, mutual funds have smaller inflows, but bond yields go up (Pettinger, T., 2012). Investors are less likely to take on additional risk and invest in newly listed companies (Pettinger, T., 2012).

Snap, Inc. made its initial public offering (IPO) with the New York Stock Exchange (NYSE). Besides having a multitude of listing requirements, such as $2,000,000 in pre-tax income and having to list at an IPO value of at least $4.00 per share, there are many rules and regulations that companies who want to list with the NYSE must follow (Listing and Delisting Requirements, 2012). In fact, there is a manual for reference where these policies are specified (Listing and Delisting Requirements, 2012). Most of these rules and regulations have to do with corporate governance and business ethics, such as having to comply with all SEC laws and disclosures as well as having an independent audit company (Listing and Delisting Requirements, 2012). Some of these rules revolve around shareholders directly, like how the company must have a shareholders meeting at least once during each fiscal year and how the company must get shareholder approval for certain activities, like issuing common stock (Listing and Delisting Requirements, 2012). Some of the rules are as simply as maintaining a website that is easily accessible by the general public (Listing and Delisting Requirements, 2012). There are many costs that come along with this much regulation (Teall, J. L., 2013). There are direct costs of providing funding to the regulatory agencies, usually out of taxes (Teall, J. L., 2013). There are indirect costs of hiring compliance officers and paying third party auditors (Teall, J. L., 2013). Specifically, the Sarbanes-Oxley Act has been highly criticized by company management for being too costly to companies because of all the reporting and compliance expenses (Teall, J. L., 2013). Because of the expansive list of rules and regulations, plus the associated costs with compliance; some companies may choose to list on another exchange that may be more cost efficient (Teall, J. L., 2013). It is also possible that companies will not be eligible because of the listing parameters (Listing and Delisting Requirements, 2012).

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