The Press This Week

Snap Will Survive Despite Its Rough First Quarter

Snap reported quarterly financial results for the first time as a public company last week, posting revenue numbers that missed estimates and that showed slower-than-expected user growth.
This poor quarterly performance had an immediate effect on the stock market, and in response, Snap shares had plunged more than 20% through after-hours trading.
The negative news follows concerns related to Facebook and its subsidiaries’ attempts to imitate the app. The user growth for the company over the last four quarters has been 17.2%, 7%, 3.2%, and 5%, respectively, which is a not an exciting pace for a company with 166m in active users.

Cause for Concern?

Snap’s IPO was highly public and as a result had its critics. Most recently, social media rival Facebook and its affiliates (Instagram, Messenger Day, WhatsApp) have displayed an effort to imitate some of Snapchat’s features, launching features such as Instagram stories, disappearing photos, live video, and filters in an attempt to compete with its opposition.
However, Snap’s CEO and co-founder Evan Spiegel has stated that he was unfazed by Facebook’s recent attempts and said: “Just because Yahoo has a search box doesn’t mean they’re Google”.
Nevertheless, investors are concerned that some of Snapchat’s slowdown in growth can be attributed to these imitations. Growth in Snapchat’s user base began to decrease last year after Facebook’s Instagram copied Snapchat’s “stories” feature.
Many analysts seem to agree with the sentiment that Facebook’s imitations are adversely affecting Snap’s growth, suggesting that the increase in Snapchat’s user base last quarter was not strong enough to disprove the notion that Facebook will outpace Snap.

What the Street is Saying

Analysts from all over Wall Street firms have publicly announced their opinions of the company and its expectations. Their sentiments vary, ranging from moving to a disappointing “sell” rating or even increasing their “sell” ratings to “buy”.
Despite that fact that Snapchat’s shares dipped over 20% following its unsatisfactory first earnings report as a public company, Cantor Fitzgerald and Oppenheimer raised their rating on the app, viewing the market’s as overreacting and seeing the price fall as an opportunity to buy low. They attribute the market’s disappointment to Snapchat’s high expectations, rather than systematic issues such as growth.
A few other major firms were less enthusiastic but didn’t seem fazed by the recent news report. Major banks J.P. Morgan and Deutsche Bank maintained kept their respective “hold” and “buy” ratings but both significantly lowered their price targets.

What Does This Mean? 

While this stream of negative news suggests struggles and impending failure for the young company, a combination of history and the app’s potential indicate a turnaround for the firm. Snap’s challenges are not unique, especially amongst tech companies.
Other tech giants have had struggles in their early days. Facebook received early criticism after its IPO report in 2012, reporting a loss in its first quarter and losing having its stock lose almost 40% of its value after two months of being a public company.
On top of that, Snapchat’s revenue has increased over $100m in the past year, establishing it as a growing company. Almost $2bn of Snap’s $2.2bn loss in the January-March period involved stock compensation costs related to the company’s initial offering.
Facebook had similar costs of roughly $1.3bn. The company’s revenue grew from $38.8m in the year-ago period to $150m. More than 3bn Snaps were sent daily in the first quarter, the company said, up from 2.5bn in the third quarter of 2016.

Snap Will Be Okay

It seems possible, and perhaps even probable, that the market is overreacting to Snap’s latest dip. The biggest challenge that the company faces is its slowing growth is userbase. However, this latest stock price dip is a greater reflection of overeager expectations rather than a symbol of the company’s potential failure.
As long as users continue to use Snapchat, the company should continue to see positive results. Snap’s stock price increased approximately 7% in trading on the following Friday, which helped the firm regain some of the value it lost after the earnings report was released.
Originally published on The Market Mogul on 24/05/2017


The Guardian view on the Bank of England: independence and accountability

Mark Carney, governor of the Bank of England

It is 20 years since the Bank of England was given the right to set interest ratesby Gordon Brown. In the two decades since, the power wielded by Threadneedle Street has increased as its performance has got worse. It is hard now to remember how serene life was for the Bank in the early days after it was granted operational independence. Stripped of its role as supervisor of the UK’s banks, the Bank effectively became a monetary policy institute, with the nine members of its monetary policy committee tweaking the cost of borrowing to hit the government’s inflation target. With cheap Chinese goods keeping prices low, this was not especially hard to do. Mervyn King, the Bank’s governor from 2003 to 2013, called the late 1990s and the early 2000s the Nice decade – as in non-inflationary consistent expansion – and it was an apt description.






Apt, but incomplete, because while the Bank was congratulating itself on hitting the inflation target, it failed to do anything to prevent the biggest speculative bubble since the 1920s. To be fair, this was not entirely the Bank’s fault. The crisis exposed the weaknesses of Labour’s tripartite system of financial supervision, with responsibility shared between the Treasury, the Bank of England and the Financial Services Authority. But the Bank did not realise until it was far too late that crises can erupt even when inflation is low. Like other central banks, it was guilty of groupthink.

The moment when the bubble burst, the summer of 2007, exposed the flaw in New Labour’s political argument for granting the Bank operational independence. Ceding control over the cost of borrowing, it was thought, would give the Labourgovernment credibility in the City and prevent the runs on the pound that had proved so electorally costly in the past. The events of 2007-09 proved otherwise. When it came to the 2010 election, voters laid the blame for a long, deep recession at the government’s door. The Bank, by contrast, was praised for taking the action needed to prevent a second Great Depression: cutting interest rates to 0.5% and printing hundreds of billions of pounds of electronic money through the process known as quantitative easing.
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With its pre-crisis failures conveniently forgotten, the Bank’s sway increased. George Osborne gave it back power to police the City and established a new financial policy committee with wide-reaching powers, including the right to decide how much a citizen could borrow for a mortgage. As well as taking on this macro-prudential role, the Bank became more political. Theresa May used her party conference speech last year to note that ultra-low interest rates and QE have consequences for the distribution of income. The losers have been savers; the winners have been those who own shares, bonds and real estate, who have seen the value of their assets rise.
The Bank’s counter-argument – that aggressive use of monetary stimulus has helped everybody by boosting growth and reducing unemployment – has merit. Even so, the recovery from the recession has been feeble. Productivity growth has been woeful and the balance between a loose monetary policy and a tight fiscal policy has been wrong. The risk is that keeping interest rates at 0.25% leads to the same reckless borrowing as before. Ominously, household debt levels are creeping back towards their previous record highs.
The Bank is now in the strange position where it is both stronger and more vulnerable than it has ever been. The criticism aimed at Mark Carney, the Bank’s governor, for his comments during the Scottish and EU referendums are merely a foretaste of what it can expect if another crisis erupts in the next few years. Willem Buiter, one of the original interest-rate setters from 1997, says central banks should “stick to their knitting” and confine themselves to setting interest rates and acting as a lender of last resort. At the other end of the spectrum, Adair Turner has argued that in certain circumstances the government should instruct the Bank to print money for public spending or tax cuts. Ed Balls, the original architect of the 1997 blueprint, says there should be a systemic risk body chaired by the chancellor that would set a mandate for macro-prudential policy.
A simple principle links these approaches: the Bank has become more powerful and more political but not more accountable. This needs to change, either by cutting the Bank down to size or by beefing up political oversight. Otherwise, the current consensus in favour of its independence will not hold.
This article was first published by the Guardian on the 04/05/17.

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