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How Will Snap’s IPO Fare?

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How Will Snap’s IPO Fare?

2016 proved to be a bleak year for the IPO market, with data provider Dealogic indicating that a mere 103 companies listed shares (raising $21.8bn) compared to 165 entities raising $34.6bn in 2015. Snap Inc’s decision to go public could, therefore, be the catalyst for the IPO market to regain momentum. But just how successful will the IPO and the future of the company be?

Snapchat is an app which allows users to send pictures and short videos to fellow uses for a maximum of 10 seconds, before disappearing. The IPO is said to value Snap Inc (Snapchat’s parent company) at $25bn which, if it holds that value, would be the highest tech company debutant in the stock market since Alibaba Group’s $168bn valuation in 2014.

Comparing Twitter’s IPO

In 2013, Twitter was the most hotly anticipated social media company to IPO since Facebook. After setting the IPO at $26.00, the day was seen as a success given the intraday high of $50.09 and close price of $44.90, a considerable 73% over. Business Insider reported that 1,600 millionaires had been made in a day.

A month later, investors were still happy given that the share price was hovering around the IPO day close price. However, less than two years later, the share price dropped for the first time beneath the IPO value and is currently sitting at $17.18. There are now talks of Twitter being acquired by one of many potential buyers such as Alphabet and Salesforce.

But why is this relevant to Snap? First, it is worthwhile to note that stocks typically close above the offer price on the first trading day, a concept described as underpricing. During the dot-com bubble (~1995-2001), close prices on the first day of trading were typically 65% of the offer price. Thus, Twitter’s 72% price pop was almost a flashback to the crazy dot-com days, when shares were traded at sky-high prices on baseless claims.

$1bnthe predicted revenues of Snap Inc in 2017

The worry for Snap Inc is if it faces a similar crash in share price later down the line following a large initial underpricing. The company has indicated to investors that it predicts revenues of $1bn in 2017. Its revenue has significantly increased since it implemented ads in 2014. However, the concern is that Snapchat’s popularity will control the share prices.

If the usage and popularity continue to grow, then the share prices should see stable growth at the minimum. However, the moment that the popularity diminishes, like Twitter, Snap Inc stocks will crash, highlighting the potential risk to investors.

The filing of paperwork to the SEC was done so confidentially in line with the 2012 Jumpstart Our Business Startups Act which allows companies with annual revenues under $1bn to file initial drafts before going public.

When asked about why the filing was confidential by a Bloomberg journalist, a Snapchat representative declined to comment. Morgan Stanley and Goldman Sachs have been chosen as lead underwriters, with further involvement from JP Morgan Chase, Deutsche Bank, Allen & Co, Barclays and Credit Suisse Group.

Potential Trouble Ahead

Only recently, a former Snapchat employee has accused the company of lying about their financials to investors. He claims that he was fired for failing to provide confidential information about his former employers, Facebook, which Snap allegedly wanted to further their IPO preparations. Snap said that these are fabricated claims. If the court case favours the employee, Snap will face huge backlash and see their IPO plans in jeopardy.

The success of Snap’s IPO day will not determine how successful the company is. Twitter and Facebook are evidence of this; Twitter is currently struggling following what was a successful first trading day, whereas Facebook, after a terrible first day of trade (and subsequent days, where some $40bn were lost by investors), has recovered to see shares valued at well over 200% of their IPO price.

Conclusion

Of course, there will be great trouble in the water if the recent court case goes against Snap. Perhaps the extent of the damage in the event of a loss will depend on how much Snap skewed the presentation of their finances. The company could get through unscathed, in which case it will continue to strengthen its preparations before the first trading day which could come as early as March. Snap has recently been trying to allure Madison Avenue, America’s advertising hub, in an effort to rally up investor interest.

For investors, the hope will be that Snap’s high revenue predictions hold true in the coming months and years and that the app’s popularity does not decline. Only time will tell if Snap will follow in the footsteps of Facebook, or tumble from the top like Twitter.

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