Snap Inc ($SNAP), the parent company for social media app Snapchat, floated on the US stock exchange yesterday with shares opening at $24 (£19.62) a share. Shares reached $24.48 (£20) by market close, a 44 percent jump, valuing the company at $28 billion (£23 billion).
This exceeded all expectations. Snap was reportedly targeting a valuation of between $19.5 billion and $22.3 billion, according to Reuters, before it priced 200 million shares at $17 (£14) on Wednesday, setting a valuation just short of $24 billion (£19 billion) and raising an initial $3.4 billion (£2.8 billion) for the company.
That is double Twitter's current market cap of $11.5 billion, making it the biggest tech IPO since Facebook in 2012. For context, Facebook raised around $16 billion (£13 billion) and was valued at $104 billion (£84 billion) at the time of its IPO.
The cofounders Evan Spiegel (26) and Bobby Murphy (28) made $217 million (£177 million) each in the IPO.
The sale always had timing on its side after the technology IPO market floundered in 2016, the slowest since 2008, so investors were keen for fresh opportunities.
The IPO was unusual in that the cofounders only issued non-voting stock: shares that do not give the holder voting rights at shareholder meetings. This means the cofounders can run the company how they like without listening to stockholders.
The pre-IPO S-1 filing stated: "We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange." Investment managers at top US pension funds were not happy about the no-vote shares in the build up to the IPO, according to the Financial Times.
Snap IPO: Is Snapchat the next Twitter or Facebook?
Investors will have to ask themselves if the latest social media float will turn out to be a money-making machine like Facebook, or a floundering mess like Twitter. Snap is going public earlier than either of the other social media giants at only five years old.
For context, Facebook held its initial public offering (IPO) in 2012, eight years after being founded, with a peak market capitalisation of over $104 billion and an opening share price of $38. Twitter's IPO in 2013, seven years after founding, opened at $45, at a market capitalisation of $26 billion.
This handy chart from Business Insider shows that Snap comes in well below Twitter and Facebook in revenue, losses and daily active users at the time of its IPO.
Snapchat says it has 158 million daily active users, far below Facebook's reported 1 billion, and is losing more than $500 million a year at the time of IPO. Where both Snap and Twitter were losing millions of dollars at the point of their IPOs, Facebook was pulling in $1 billion in profit the year before floating. Monetising users should be the key metric for companies like these, but that hasn't stopped investors flocking to Snap stock.
Snap IPO: "Camera company"
Snap Inc describes itself as a camera company in its IPO filing, but it is not yet clear what this means exactly. The filing does admit that Snapchat's first foray into hardware with Spectacles "has not generated significant revenue" though.
It went on to state: "We do not have manufacturing capabilities and depend on a single contract manufacturer. If we encounter problems with this contract manufacturer or if the manufacturing process stops or is delayed for any reason, we may not deliver our hardware products, such as Spectacles, to our customers on time, which may seriously harm our business."
In the build up to the IPO the New York Times reported that the company is also developing a drone to allow for users to snap overhead footage.
Snap IPO: Risk Factors
In its initial IPO filing with the SEC the risk factors set out for investors ran to 42 pages. This treasure trove of concerns included what I will call 'the Twitter problem':
If we are unable to successfully grow our user base and further monetise our products, our business will suffer.
In addition to this the filing also seems to admit that Snapchat recognises that its app is hard to grasp for casual users, which would hinder growth.
The filing had a series of ten diagrams showing how to navigate the seemingly simple app. It read:
These new behaviors, such as swiping and tapping in the Snapchat application, are not always intuitive to users. This can create a lag in adoption of new products and new user additions related to new products. To date, this has not hindered our user growth or engagement, but that may be the result of a large portion of our user base being in a younger demographic and more willing to invest the time to learn to use our products most effectively.
The media-shy cofounders also laid out their concerns around unfavourable press coverage in the document, stating:
We and our founders receive a high degree of media coverage globally. Unfavorable publicity regarding us, for example, our privacy practices, product changes, product quality, litigation, or regulatory activity, or regarding the actions of our partners or our users, could seriously harm our reputation.
One of the more blunt, and worrying for investors, risk factors states:
We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
This is a fairly common risk factor in tech S-1 filings, but that doesn’t dampen the fact that investors will have to trust that Spiegel can work out how to turn Snap into a profitable company.
Conclusion: Should you invest in Snap?
What this boils down to is that for Snap to be a sound investment you would have to believe that the company is capable of creating more popular products in the future, also known as forecasting future returns on past performance, which tends to be a bad idea. Essentially an investment in Snap, complete with no voting rights, is an investment in Spiegel's genius and your comfort levels with that.
Institutional investors, brokers and the lucky venture capitalists are the winners here, as per, but would I invest some of my journalist salary, using my imaginary stock broker, in Snap stock? Not a chance.
It will be interesting to see if any other tech unicorns look to test the public markets following Snapchat's successful raise.
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