February 7, 2017    3 minute read

Snap Inc: An Unusual IPO?

Flash Sale    February 7, 2017    3 minute read

Snap Inc: An Unusual IPO?

Snapchat is an app owned by Snap Inc, founded by Bobby Murphy and Evan Spiegel in 2011. It has been downloaded and used by more than 200m people. The Snapchat was originally aimed at connecting people and friends by allowing them to send and receive pictures that could be seen just once. Of course, as with almost every app, it has gone through several improvements and updates.

Now, it is considered among the most influential social networks. It has developed several features and its importance is growing fast. It is used as an advertising platform, with media and television programs promoting shows, for example, or and increasingly used by customers as a payment method with Snapcash (developed in cooperation with Square).

Snap Goes Public

On Thursday, February 2nd, 2017, Snap Inc, the parent company owning the app, finally filed the mandatory S-1 requested by the SEC (Securities and Exchange commission) requesting to go public for an extraordinary figure of $25bn on the New York Stock Exchange (with the acronym ‘SNAP’).

$25bn Snap’s expected valuation

Its shares should start trading publicly in March, but no major info has been disclosed and uncertainty around the event is still pretty high.

Investor Sentiment

Usually, when tech companies go public, due to the high uncertainty and difficulties encountered while assessing their value because of the strong presence of intangibles and growing opportunities, shares are usually under-priced, hence investors could lock in huge gains in the first days of trading.

For these reasons, a successful IPO should theoretically be expected. However, in reality, it seems like investors are not that confident about the company, despite the fact that Snap Inc’s revenues went up from less than $59m in 2015 to $404.5m in 2016.

On the other hand, in fact, some issues have arisen that are worrying investors. Firstly, and most importantly, it is widely known that most of the shareholders expect cash dividends and want some power in decisions regarding their company. However, this is not the case with Snap Inc, which has a rather unfriendly corporate governance structure.

For the very first time, in fact, an IPO will be done with no voting rights on stocks, which will leave undisputed power in the hands of the young CEO, Mr Spiegel. Moreover, on the profitability side, costs as well as revenues are increasing dramatically, and margins are therefore pretty thin.

What to Expect?

62 Snap’s valuation-to-revenue ratio

And ultimately, Snap Inc is valuing its businesses $25bn – which even among the most optimistic is a bit too high. Analysing the company using some financial metrics shows the extent of its overconfidence. The valuation-to-revenue ratio (price-to-earnings being unreliable in light of exceptional losses in 2016), shows that Snap Inc assesses its value at around 62 times its revenue, while Facebook – which is Snap’s closest competitor given that it owns photo platform Instagram – stops at 13.

Of course, it must be noted that Facebook has probably ended its fast-growth phase and it is now growing at a more moderate pace, but the fact remains that 62 is overly optimistic.

It can be concluded that, whilst Snap Inc going public will be a major event in financial markets, there is still too much uncertainty to judge whether it will se future success. The issue of subscription prices still needs to be settled, among other things. One thing is for sure: investors that decide to buy Snap shares could end up being big winners or ultimately disappointed. A great show is guaranteed either way.

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