Snapchat is a social media platform, centered around the premise of disappearing messages and is quite popular amongst teens and young adults, between the ages of 18 and 34. As it stands, Snapchat is not profitable, generating no revenue, despite being valued at a considerable multiple by Investment banks, who consider their vast consumer base and radical means of advertising as precursors to potential revenue growth long term.
In spite of this, Snap (SNAP, US) is expected to sell 200 million shares at price around $17 a share on Thursday, giving it a perceived market value of roughly $24 billion. If Snap were to over perform market expectation, however, this could serve to revitalize the relatively dormant tech IPO market with a flood of analysts and investors. As Sean Stiefel, portfolio manager at Navy Capital LLC stated, “People love the space, and it isn’t like there’s a new entrant every quarter or every year even,” when addressing the rather stagnant tech market.
As of January, more than 150 technology companies were valued at $1 billion or more, according to The Wall Street Journal and Dow Jones VentureSource. In spite of this, few technology companies have taken their businesses public. In 2016, investors pulled into available IPOs, including Nutanix Inc. and Twilio Inc, which have been up to over 100% respectively.
Snap is currently working alongside lead underwriters Morgan Stanley and Goldman Sachs to allocate new shares into the market. As it stands, the company has planned to issue a temporary lockup or freeze on planned float, thereby restricting investors from openly selling shares of the company before year end. This, in turn, will serve to reduce volatility for the stock as traders won’t be able to take short-term positions and capture sharp price appreciations over a narrow time horizon.
However, despite the recent hype surrounding the stock recently, money managers and large asset managers aren’t quite as optimistic. Many investors question the long-term demand for the shares after they begin trading, noting that traditional investors might indirectly weight on the stock’s price and force those who do buy to sell in the event the company was to report dismal earnings. Paul Nolte, a senior portfolio manager at Kingsview Asset Management, said that he is struggling to rationalize Snap’s rather large valuation given their low revenue-per-user ratio. Later noting that “neither he nor his clients use Snapchat —which makes it hard to see a user-growth case.” As a result, Nolte has decided to defer investing in the company, until a long-term case presents itself.
This raises the questions, whether Snap’s optimism will begin to fade as investors fail to see realized gains from the social media company. Thus, boiling down as to whether investors trust Evan Spiegel, CEO of Snap, and his proposed plans for the future. However, with Snap reporting slowing growth in user acquisition and increased competition from Facebook’s Instagram, Snap may find it increasingly more difficult to assume market share whilst maximizing profitability.
Yet while the future of Snap may appear mixed, the opportunity they provide for advertisers remains in unanimous consensus. Though according to Kim Forrest, vice president at Fort Pitt Capital Group, the possibility of Snap returning shareholder capital does not seem to be a suitable convention for quite some time.
As of 3/2/17 Snap is up 44.00% at $24.48 as investors pool into the company on future growth prospects. About $5 billion changed hands in Snap stock, despite backlash from some Wall Street analysts issuing a sell rating on the company. Looking ahead, Snap will have to monetize on their consumer base or suffer a similar faith to Twitter. Below are comparable companies from IPO to current listings.
- Facebook went public on May 18, 2012, priced at $38 per share. It gained only 0.61 percent in its debut closing at $38.23.
- Twitter went public on Nov. 7, 2013, priced at $26 per share. It gained 72.69 percent in its debut closing at $44.90.
- Alibaba went public on Sept. 19, 2014, and priced at $68 per share. It gained 38.07 percent in its debut closing at $93.89.