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Will Snap Inc Lead The Way For More ‘Unicorn’ Tech IPOs?

Chain Reaction

Will Snap Inc Lead The Way For More ‘Unicorn’ Tech IPOs?

Back in 1999, around the peak of the Dotcom bubble, the US tech sector revelled in a total of 371 initial public offerings. Having dropped to just 20 IPOs in 2016, this makes the market’s excitement around Snap Inc’s IPO more understandable: a $24 opening price valued Spiegel’s wunderkind at $28 billion ($34bn in diluted terms), equating to 70 times Snapchat’s 2016 gross revenue.

High market optimism has resulted in a 44% price increase on the first day of trading, though it has since cooled down back to about $20.5 a share. While some analysts may fear that Snap is overvalued, indicating that its Snapchat product has no clear path to profitability before 2020, this pullback can be most likely be attributed to profit-taking by investors.

However, the question remains as to whether further losses are on the horizon, as Snapchat is experiencing slowing user growth, still exhibits a rudimentary business model, and deprives shareholders (for Class A shares purchased on the NYSE) of their voting rights.

Just a Fickle Trend?

Since going public in 2012, Facebook’s shares have appreciated about 600%. Conversely, Twitter, who experienced a 70% surge on the first day of trading, has dropped to 40% below its initial offer price. This makes traders and portfolio managers more apprehensive as they try to appraise Snap’s legitimate value.

Data from eMarketer

According to Bloomberg’s estimations, daily video views on Snapchat have jumped from 8 billion to 10 billion in the space of 2 months, from February to April 2016. Such growth can most likely be attributed to the immense popularity of the ‘stories’ feature, which allows Snap to collect ad revenues and could soon bring in profits for shareholders.

Another indication alluding to impending profits are Snap’s claims that its vertical video ads are significantly more engaging (by a factor of five) than its nearest competitors, which include Alphabet, Twitter and Facebook, as reported by Adweek.

Turning Profitable

Moreover, there is an increasingly clear movement of tech companies seeking to glamorise their image before going public, exemplified by both the software enterprise AppDynamics, which diminished its operational cash losses from $40m to just $2.2m within a year, and Twilio, a cloud communications platform service which altered its structure to become cash flow-positive prior to its IPO pitches to potential investors.

Snapchat’s popularity and substantial brand equity meant that they could defy such a trend, maintaining immensely high cash burn rates and negative profits without ultimately being penalised in their IPO valuation. However, vigilant investors with a long-term outlook surely remember the Dotcom bubble all too well, and know that things can turn sour when profits and other red flags in business models are overlooked. Webvan, for example – the poster child of the Dotcom bubble – had an overly complex infrastructure model, expanded too quickly, and implemented the wrong pricing model given their target audience segmentation.

More Unicorns to Come?

Which will be the next tech unicorns to make their move towards the public markets? Uber Technologies and Palantir Technologies are two likely bets by investors. While the former is widely known as a car-hailing company with a valuation of $68 billion – especially well-known now that sexism and racism allegations plague CEO Travis Kalanick – the latter, a Big Data analysis software company with lots of government clients, is not so much in the public eye.

A thriving M&A market also provides solid support for IPO activity. For example, Microsoft’s $26bn acquisition of LinkedIn (the biggest in its history) could lead to capital flowing to the stocks of new market entrants. A 2017 increase in tech IPOs looks increasingly likely with encouraging market conditions (both the S&P 500 and Dow Jones have attained record highs) and many highly-valued private companies that have matured and are waiting to go public (such as Airbnb and Dropbox).

Unlocking the Tech IPO Market

Considering the strong performance of unicorns who took the leap of faith and went public in 2016, this year increasingly looks like a breeding ground for large-cap deals.

In its annual IPO Pipeline Report, CB Insights has analysed the market and documented likely candidates to go public who have raised funding in excess of $1m. Unicorns with the most momentum include popular candidates such as Uber, Airbnb and messaging platform Slack, whereas the ones most likely to go public are actually less trendy: Blue Apron (a meal kit delivery company), Qualtrics (a research software firm) and Pluralsight (which provides on-demand tech learning). Other potential non-tech candidates who have expressed their desires of going public include Vice Media and the renowned parka manufacturer Canada Goose.

Whether unicorns are able to vindicate their arguably exorbitant paper valuations remains to be seen. However, the general tone towards tech IPOs remains positive as Trump’s election promise of lower corporate taxes should benefit such companies.

 

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