Initial euphoria, but success won’t be a snap
SNAP IT UP: Monitors display Snap signage at the NYSE before the IPO this week. Snap makes the disappearing-photo app that relies on the fickle favour of millennials SNAP surged 44% in its stock market debut this week, valuing the disappearing-photo app maker at more than $28-billion (R367-billion).
That’s a vote of confidence in the company’s ability to grow quickly and fulfil its promise of new products to change how people communicate.
Snap, which started with a mobile phone app for sending vanishing photo and video messages, has been building out its advertising and media business, reminding investors of the early days of Facebook and YouTube.
Even so, some analysts are betting the rally won’t last; two have already given the shares a “sell” rating, one with a price target of just $10.
Why? Snap is years from profitability, with a net loss higher than its revenue. User growth on the Snapchat app slowed in the fourth quarter, fuelling scepticism about how big the company’s advertising business can be.
Investors still don’t have a clear picture of how the company plans to become profitable, so instead must put their faith in CEO Evan Spiegel, who rarely talks publicly about his vision.
“There’s reason for caution,” said Jessica Liu, an analyst at Forrester Research. The success of Facebook — which priced shares at $38 apiece in 2012 and now trades around $136 — is an anomaly, she said. Snap needs to improve its user growth and prove the value of its ads. “Its TV-like revenue pursuit is new and untested.”
Snap sold 200 million shares in its IPO at $17 each, above the $14 to $16 marketed range. It was the biggest social-media IPO since Twitter more than three years ago, and the first CO-FOUNDER: Evan Spiegel tech company to list in the US this year.
A little less than two hours before Snap started trading at 11.19am on Thursday, Spiegel and co-founder Bobby Murphy rang the NYSE opening bell alongside exchange president Tom Farley.
At the IPO price, Snap had a market valuation of about $20billion, implying a multiple of about 21.4 times EMarketer’s esper timate for its 2017 advertising sales. That means the company went public at a valuation at least twice as expensive as Facebook, and four times more costly than Twitter.
Snap, which posted a net loss last year of $515-million, even as revenue climbed almost sevenfold, has plenty to prove.
It needs to increase revenue user and address slowing user growth — which fell below 50% in the fourth quarter for the first time since at least 2014.
“Snap presents investors with the opportunity to invest in the company behind an innovative, large-scale, and distinctively young-skewing platform,” said Brian Wieser, an analyst at Pivotal Research Group. “Unfortunately, it is significantly overvalued given the likely scale of its long-term opportunity.” He gives Snap a sell rating.
The company also needs to convince investors to put their complete trust in its management. Snap listed nonvoting shares, the first company to do so in the US.
That means stockholders will have no influence on things such as director nominations and executive compensation or be able to take matters to the annual meeting. Spiegel and Murphy will be responsible for the decisions that lead to Snap’s success — and on the hook for its mistakes.
At the same time, its advertising model is still evolving, with many brands using the platform to experiment with one-off campaigns before committing to longer term spending. While the advertising business was built up from nothing in about two years, advertisers have said that the ad-buying process is overly complicated.
They’re also concerned about accessing only a narrow demographic through Snapchat — its core user group of teens and 20somethings.
The aftermath of an IPO is always a game of expectations, with companies measured against what they promised in prelisting presentations. Snap’s pitch to investors is distinctly WHAT A SPECTACLE: Matthew Kobach, manager of digital and social media at the NYSE, takes a selfie wearing a pair of Snapchat Spectacles
Its TV-like revenue pursuit is new and untested
different from Facebook’s or Twitter’s. While those companies emphasised trying to become a global brand, Snap will instead focus on developed markets, it said in its IPO filing.
The company doesn’t want to be measured primarily on user growth, a metric that has plagued Twitter since its IPO. Snap says that metric will be “lumpy”, as will its performance.
Instead, it will ask investors to focus on how engaged its users are with the app, and how much revenue the company can make per user. “The company has done a good job setting expectations at the right level,” said Hemant Taneja, an MD at General Catalyst Partners. His venture firm invested in Snap.
Still, it will be difficult to escape the comparisons.
Facebook, with about 1.86 billion active daily users on its flagship platform and 1.2 billion monthly users on WhatsApp, trades at a multiple of about 10.5 times revenue estimates for this year.
Facebook’s Instagram introduced a video-reel feature — similar to Snapchat’s stories — that already has 150 million daily users. That’s in line with Snap’s daily active count of about 158 million.
Snap faces what Facebook and Twitter faced, but is framing its future differently. Instead of being dependent on its Snapchat app, the company changed its name a few months ago to emphasise that it will eventually be a portfolio of many products, such as its Spectacles video-capturing glasses, and other experiments to come. — Bloomberg