Growth Options – The Case of Snap

Growth Options – The Case of Snap
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In my previous discussion of growth options, I used Tesla as an example. A better example is Snap. Before saying why, a word of disclosure. My godson, Evan Spiegel, was one of the founders of Snap. That said, I know nothing about the company other than what I get from public sources. One thing that is clear from those sources is that the value of Snap is almost entirely growth options. Based on current operations, the company has large losses and negative cash flow. For Snap to have any meaningful value, it has to grow and grow profitably. That means exercising growth options.

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The problem is that no one can say with any certainty what Snap's growth options are let alone how valuable they might be. As a result, the market value of the company can swing wildly as perceptions change regarding the growth options. And swing it has. Starting from an IPO price of $17 the stock shot to $25 and has since dropped almost 40% to 15.52 on virtually no fundamental information. Does the lower price mean the stock is now "cheap?" Not at all. It still depends entirely what you think about the growth options. The stock could be worth anywhere from basically zero to nearly $50 depending on those growth options or lack thereof. Talk about risk.

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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.
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