Snapchat IPO – what you need to know

<p>Snap Inc., the parent company of disappearing message service Snapchat will have its IPO on Wednesday 1st March, and it’s certainly going to be one of the biggest U.S. technology floats for years. Here are some key facts we think are worth bearing in mind.</p>

Updated on Wednesday 1st March 0904 gmt

UPDATE: We now know that whilst the public stock of Snap Inc. will be launched on Wednesday 1st March, it will not start trading on the open market till Thursday 2nd March. We have amended our key facts to reflect this new information.


 

Snap Inc., the parent company of disappearing message service Snapchat will have its IPO on Wednesday 1st March, and it’s certainly going to be one of the biggest U.S. technology floats for years. Here are some key facts we think are worth bearing in mind.

 

  • Snap Inc., parent co. of Snapchat is expected to ‘price’ its shares on Wednesday 1st March, after the U.S. market closes
  • To ‘price’ essentially means gathering of institutional orders and allocation of shares to those orders. During that process, the price at which the stock is expected to be sold at may be adjusted—raised or lowered—to reflect changes in demand
  • Snap Inc. plans to sell 200 million shares priced $14-$16 each, holding on to equity that was recently valued around $13bn-$15bn
  • That means Snap Inc. will raise as much as $3.2bn. That’s a lower valuation than estimates that were doing the rounds last year
  • Facebook comparisons are inevitable, given that FB is Snapchat’s biggest rival, and perhaps after Snapchat’s founders famously rejected an offer from Facebook of $3bn in 2014. Those comparisons don’t necessarily place Snapchat in a favourable light
  • Snapchat has now been around for five years and has 158 million daily average users. That’s less than Facebook had at the time of its 2012 IPO: 526 million
  • And the rate at which new users are joining Snapchat looks to be decelerating fast. Average daily user growth slowed to 3% annually in the fourth quarter of 2016, from 14% in Q4 2015
  • On valuation grounds too, Facebook looked less ‘overcooked’ than Snap does now. FB was privately valued at $10bn at the 5-year mark. That was a multiple of around 35 times annual sales. Snap could be priced around 50 times annual sales. Worth it?
  • Snap is not profitable. It has burned through about $1bn in 2 years. A lack of profitability, though, is par for the course for Internet and technology groups like Snap, which tend to follow a well-worn script
  • And whilst the group has also stoked a degree of notoriety for its rare move to launch public stock with no voting rights (only execs and founders have voting shares) in practice, many tech companies are similar. Many founders hold the most shares in Big Tech firms, even if all stocks have votes (this is the case at Google owner Alphabet, Facebook, and others)
  • Some investors will however, take the risky facts we lay out above as red flags. After all TwitterGrouponZynga and Fitbit quickly fell below their IPO prices and have never recovered
  • U.S. technology IPOs tend to have a poor recent record looking more widely too:
    • 14 out of the 25 biggest technology shares we tracked fell in their first year on the market
    • That includes 9 out 15 that raised at least $1bn
    • Their shares fell between 9% and 80%
  • It does however appear that Snap Inc.’s top managers are cognisant of technology flotation pitfalls: the increasingly conservative valuation can actually be interpreted that way instead of a sign of dwindling investor enthusiasm
  • Also on the more promising side, Snap’s rate of top-line growth is impressive…
  • Companies with Snapchat’s youthful audience do not come to the market every day of the week, or even every few years. 52% of Snapchat’s total users were aged 16-24 in the second quarter of 2015…
  • Unlike Twitter, for instance, the group’s pace of innovation is perceived to be faster. For instance, among other developments beyond chat, the company now serves over 10 billion videos daily

After a year of slim pickings for IPOs, pent-up demand in a buoyant stock market is likely to make Snap difficult to resist—at least for a while.

 

 

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