Activist investor urges Snap's Evan Siegel to cut his workforce
Irenic Capital Management portfolio manager Adam Katz sent a letter to Snap Inc. (SNAP) co-founder and CEO Evan Siegel on Tuesday, urging the company to cut costs, improve its deployment of artificial intelligence and to rethink its product offerings.
Central to Katz's argument is that Snap has "significantly underperformed" as a public company, with its shares down 77% since its IPO in 2017.
"Snap should be worth a lot more than $7 billion," Katz wrote, calling it a "comically small sum" that the company could be sold for at this point.
The letter calls on Snap to "rationalize" its cost structure, pointing out that the company had about 3,000 employees before the Covid pandemic and now has over 5,200 today.
"Like many of your peers, you over-hired," Katz wrote. "Unlike your peers, you haven't course corrected."
He points to Meta Platform's (META) "Year of Efficiency" strategy that led to a roughly 25% reduction in its headcount. He also cite's Block, Inc.'s (XYZ) recent decision to cut about half its staff.
Katz notes that Meta has outperformed Snap by 477 percentage points since it launched its "Year of Efficiency" initiative.
The letter was part of a larger presentation from Irenic Capital Management called "Snap Back to Reality" in which the activist investor details its strategy to boost the company's market cap to $35 billion.
Snap's shares surged 14.6% on Tuesday because of Katz's letter.
A push to focus on AI-driven ad sales
Among its recommendations, the firm said that Snap should spin off or shut down Specs, its augmented-reality (AR) eyeglasses unit. The presentation notes that Snap has spent about $3.5 billion on Specs, including roughly $500 million in cash annually.
"AR wearables is a weak market with intensifying competition, and SNAP’s issues are compounded by its narrower product offering and limited evidence that consumers will pay a premium for AR glasses at scale," the presentation stated.
Katz said in his letter to Spiegel that Specs serves as "a distraction" to what is the company's core business, which is selling ads and subscriptions.
He recommends that the company should improve its deployment of AI with its ad business, using Facebook and AppLovin Corporation (APP) as examples of companies that have seen "dramatic growth" in ad sales through the adoption of AI tools.
The presentation also said that AI should be leveraged to drive efficiency and remove excessive layers in its organization.
"Snap should not continue doing what it has been doing. It’s not working," Katz said. "And we’re not telling you anything you don’t know already."
Irenic said that it owns about 2.5% of Snap's Class A shares. The firm is calling on Snap to improve corporate governance, noting that public shareholders have no voting rights.
It also said that as the company's share price improves, it should use the "newfound cash and profitability" to invest in privacy, safety and parental controls.
Texas Attorney General Ken Paxon recently sued the company over its Snapchat app, alleging that the company has failed to warn parents and consumers about "inappropriate material on the platform and the app's addictive design."
And last week the European Commission said that it has opened a formal investigation into whether Snapchat violated the Digital Services Act (DSA) by exposing minors to grooming attempts and recruitment for criminal purposes.