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Will Snap be a Facebook or a Twitter for investors after IPO?

Snap’s IPO is bound to be well taken up, despite a high valuation, as it marks one of the biggest and most-anticipated US tech IPOs for years. But will it prove to be a Facebook or a Twitter in terms of its future performance? 

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Snap Inc, operator of the Snapchat virtual messaging app, has announced its initial public offering (IPO). Its plan to raise $3 billion, giving itself a valuation of up to $25 billion, makes it the biggest offering since Chinese e-commerce giant Alibaba floated in the US in 2014.

Given the reluctance of other so-called ‘unicorns’ (private companies valued at $1 billion or more) to float, as taxi hailing app Uber and Airbnb say they want to remain private for the time being, it is hotly awaited.

However, it has also been accused of over-valuing itself, and investors are raising concerns that they will get no say on the running of the company. Snap says its IPO will be the first to offer shares with no voting rights at all.

In terms of valuation, concerns centre on the company’s widening losses and when, or if at all, it will become profitable. There are also fears about Snap’s shifting business model. It started as a social media app that allowed users to send messages that disappear after 10 seconds. That quickly caused controversy as so-called ‘sexting’ hit the headlines.

Since then Snapchat added more functions including the ability to add longer-lasting collections of photos called ‘Stories’ and a platform for publishers called ‘Discover.’

However, in its IPO filing, Snap called itself a ‘camera company.’ It has already launched sunglasses named ‘Spectacles’ that allow users to record videos on the move, and the company may see its future in the hardware as well as the software market.

When considering the valuation, it is worth comparing Snap with Facebook and Twitter, two of its main competitors. 

  Snap Facebook Twitter
IPO amount $3 billion $16.1 billion $1.8 billion
Co valuation at IPO Up to $25 billion $104 billion $14.2 billion
Current valuation $378 billion $12.5 billion
Share price move since IPO Up 242% Down 58%
Number of users 158 million daily users 1.86 billion monthly users 317 million monthly users
2016 revenue $405 million $27.6 billion TBA 9 Feb ($2.2 billion in 2015)
2016 profit/loss $515 million net loss $10.2 billion net profit TBA 9 Feb ($521 million net loss in 2015)
Average revenue per user $1.05 globally, $2.15 in North America $4.83 globally, $19.81 in US and Canada TBA 9 Feb

 

The figures speak for themselves. At the moment, Snap looks much more like Twitter than Facebook. While the latter is trying to rival Google in terms of share of the rising online global ad spend, Snap is in a much lower league.

WPP, the world’s biggest media buyer, said that in 2016 clients spent about $1.7 billion advertising on Facebook, compared to $5 billion they spent on Google ads. Spending on Snapchat ads equalled just $90 million.

Twitter is struggling, despite the publicity it is getting from the new US president Donald Trump’s decision to use it as his main communication channel. The company is expected to report a 4.2% increase in the fourth-quarter revenue, but a 25% decline in adjusted net income when it reports in a few days. What's the problem? Competition from Snapchat and Facebook’s Instagram. 

That’s not to say advertisers aren’t interested in the young clientele using Snapchat, and the growth potential for the company may be higher than for Google or Facebook. However, the uncertain revenue growth in the future does not support a valuation of up to 60 times current sales, versus Facebook at 14 times sales and Twitter at four times sales.

Snap is already facing tougher competition than it did just a year ago, as Facebook and its Instagram platform copy many features that Snapchat pioneered. Its costs are already higher than its revenues, and they will have to rise further if the company continues down the hardware path.

Amid the risk factors that Snap highlighted in its IPO prospectus is the warning that it ‘may never achieve or maintain profitability.’

At the first glance, concerns about valuation and voting rights would appear to make Snap’s IPO pretty unattractive. But this is a major US tech company, and one with huge growth potential if its management gets it right. There’s lots of hype to go with the listing, and shares may well go higher in the early days. What happens after that is anyone’s guess at this stage.

Remember, Twitter’s shares soared in the first six weeks after its listing, reaching a peak of $69 a share before going on a steady decline to the roughly $17 a share they now trade at. Facebook, on the other hand, fell in the months following its 2012 IPO, before going on a four-year uptrend that’s ongoing and has left the stock at about $130 a share.   

Snap’s shares, once they start trading, have another supportive factor. Facebook covets Snapchat. It last tried to buy Snapchat for $3 billion back in November 2013, and it has copied some of Snapchat’s features to its own services. It could be that Facebook, and possibly Google, may yet decide to try and buy Snap. That will underpin the share price.

Snapchat IPO

Learn more about the upcoming technology IPO for Snap Inc., the parent company of Snapchat, and how to trade our grey market.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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