Snapchat IPO: The Biggest IPO of 2017?
Last year was terrible for tech initial public offerings (IPOs). Only 26 tech stocks went public on U.S. exchanges in 2016, and they only managed to raise $4.3 billion, the lowest numbers in both categories since the Great Recession. This has created a starved investor class greedy to jump on the next big tech company’s IPO.
Enter Snap Inc.’s IPO. The Snapchat IPO could very well be the biggest of 2017 (aside from a potential Uber Technologies Inc. move).
The Snap market value is currently sitting in the $20.0 billion to $25.0 billion range, with some analysts even putting it as high as $40.0 billion. That makes the Snap IPO the initial public offering to watch in 2017. Why is Snapchat worth $20.0 billion? As you’ll see below, it’s all about the user base. And more specifically, the demographics. (Source: “Snapchat has filed for an IPO that could value the company at $25 billion,” Business Insider, November 15, 2016.)
So when is Snapchat going public? Slated for March 2017, the move could generate huge waves in the tech industry, as the highly anticipated IPO is being compared to its predecessors, both good and bad.
Is Snapchat the New Twitter?
On the one side, you have Twitter Inc (NYSE:TWTR). Seen as a sort of worst-case-scenario for the Snap IPO, Twitter went public with a similar focus on daily active users being the main draw of the company.
With the latest leaked numbers putting Snap’s base as high as 150 million, the potential is there for huge advertising revenue and, if growth holds up, future prospects of the company. But, then again, it has to avoid the same pitfalls of its social media predecessor. (Source: “We’re about to learn everything we’ve wanted to know about tech’s most secretive company,” Business Insider, February 2, 2017.)
As we’ve all seen in the widely documented downfall of Twitter stock, having a huge and active user base is not a guarantee for success. Twitter’s stagnation in that area has led to a near-60% collapse in share prices since its IPO in late 2013, with 2016 alone bringing TWTR stock down 29%.
…Or the New Facebook?
For those looking for a more optimistic outlook on Snapchat’s IPO, you have the Facebook Inc (NASDAQ:FB) comparison.
Both are highly popular social media companies with products that appeal to the advertiser-coveted 18-34 generation. Ratings agency Nielsen Holdings PLC puts as many as 41% of the 18- to 34-year-old demographic in the U.S. making use of the ephemeral messaging app. (Source: “Snapchat Parent Files for $25 Billion IPO,” The Wall Street Journal, November 15, 2016.)
The Threats Facing a Snap IPO Value
While a Facebook comparison is certainly a welcome one for any upstart public company, there is danger in that connection as well. The legacy social media company has been trying for years to either ape or acquire Snapchat. Facebook’s most recent—and brazen—attempt at cutting into Snap’s market was the introduction of “Instagram Stories.”
Essentially an identical duplication of Snapchat’s “Stories” feature (Facebook didn’t even bother to change the name), Facebook has been using its subsidiary Instagram as means to challenge Snapchat.
And there’s reason to be concerned for even the most ardent Snap Inc. enthusiasts. According to Piper Jaffray Companies’ (NYSE:PJC) twice-annual survey, 32% of U.S. teenagers cited Instagram as their most important social network.
Instagram also has the power of one of the world’s richest tech companies backing it, including all the data analytics, money, and expertise that Facebook can provide to help boost it over Snapchat.
Instagram Stories has also demonstrated that it can produce, fast: 150 million of Instagram’s daily active users access the feature, up from 100 million in October 2016. (Source: “Instagram’s Snapchat replica begins monetizing,” Business Insider, January 12, 2017.)
Which means that diversification may be the order of the day for Snapchat following its IPO. And, to its credit, it has not been lagging in this regard. It is trying to avoid falling into same trap as Twitter by distancing itself from any comparisons to the company in pitches to banking analysts.
Snap Inc. has also attempted the same strategy with Facebook, in an effort to avoid pitting the two companies as rivals. But, with Facebook’s bald-faced copying of many of Snapchat’s features, it’s hard not to see the two as competitors. (Source: Business Insider, February 2, 2017, op cit.)
Diversification is also a topic that many investors will want to focus on following a Snapchat IPO. The company has branded itself as a “camera company” which believes “that reinventing the camera represents our greatest opportunity to improve the way people live and communicate. Our products empower people to express themselves, live in the moment, learn about the world, and have fun together.” (Source: “Six questions Snap’s IPO filings will hopefully answer,” Quartz, January 31, 2017.)
This raises the question: what was Snapchat originally created for? To be a messaging app, or to branch out into a tech hardware empire?
Signs point to the latter. “Spectacles”—essentially sunglasses with a built-in camera—have become Snap’s first physical product offering, versus software. While not yet widely available (the company has engaged in guerrilla marketing tactics, placing the gadgets in vending machines that pop up seemingly at random), Spectacles could be the beginning of a new direction for Snap Inc.
Evan Spiegel, Snapchat Owners, and Snap Revenue
One thing that may dissuade investors interested in jumping in on the Snapchat bandwagon concerns the relative secrecy revolving the company. It is notorious for holding its cards close to its chest.
But that is all set to change, with Snap Inc.’s IPO prospectus, which will reveal a lot of unknowns about the inner workings of the mystery-shrouded company.
Back in mid-November, the company filed its paperwork with the U.S. Securities and Exchange Commission (SEC) confidentially, as it registers a revenue of under $1.0 billion. But, once the paperwork is made public, potential investors will be able to comb through the document to see if this is a company in which they’d like to sink their money.
One of the big questions that will be answered by the filings will concern ownership, and more importantly, the Evan Spiegel-Snapchat relationship.
Who Are the Snapchat Owners?
You have Spiegel, CEO and co-founder, who is reportedly going to retain up to 70% of voting power along with his co-founder Bobby Murphy. The two will also retain about 45% of the stock. Coupled with reports that investors in the IPO will not get any voting power, and you have what The Wall Street Journal described as an “extreme” decision. It is out of the ordinary to not issue any voting power to IPO investors, with companies often opting to offer fewer votes per share to the public.
The makeup of this deal will then allow Evan Spiegel and Murphy to hold sway in key decisions like the makeup of the board. (Source: “In Snap IPO, New Investors to Get Zero Votes, While Founders Keep Control,” The Wall Street Journal, January 16, 2017.)
And you might be asking yourself: How much is Evan Spiegel worth? Currently $2.1 billion. But expect that number to rise with the Snapchat IPO. (Source: “America’s Richest Entrepreneurs Under 40 2016,” Forbes, December 2, 2016.)
Another concern in need of demystification has to do with the company’s revenue. Just what exactly do these figures look like?
The most recent information leaked about the company puts the 2016 projected advertisement revenue between $250.0 million to $350.0 million. A recent report from eMarketer Inc. projects that Snap will see a large boost in ad money going into 2017, jumping all the way up to just under $1.0 billion, at $935.5 million. (Source: Business Insider, February 2, 2017, op cit.)
And the paperwork will also provide insight into the company’s other revenue streams, including Spectacles. If Snapchat does eventually hope to diversify itself beyond just a social media company and enter the world of hardware, the numbers on Spectacles and other hardware sales will be critical if the app designer truly does want to shift into a camera company.
Also worth noting is that a Snap valuation of $25.0 billion would represent a 25-fold multiplication of the projected 2017 revenue, a rather large disparity.
Another point of interest for the savvy observer will be the user numbers. While the last report has the company logging 150 million daily active users, the filings will provide the most recent figures that will help potential buyers chart its growth, or make projections as to where it can go next.
The company is reportedly pitching itself as a crucial app in the lives of its users, trying to win over investors. Bloomberg reports that this has been a key part of the pitch from the management team to analysts from the banks underwriting the IPO.
According to the report, on display was the percentage of users who take photos using the app’s camera, as well as how many of those images employ features like geofilters or are being saved with the new “Memories” feature. Snap is also touting the percentage of users sending messages through its chat offering.
This is an important move for Snap, as convincing investors of the value of its engaged users will help protect it against the early stages of business where short-term performance may be uneven. (Source: “Snapchat Is Justifying Its $20 Billion Valuation by Emphasizing User Engagement,” Bloomberg, January 20, 2017.)
Snap IPO Price Per Share
Determining the price per share is a tricky matter, as that information will only be revealed the night before the company goes public. Having said that, there is room for projections (although this is, of course, an inexact science).
Twitter stock, for instance, issued an IPO with a valuation of $14.2 billion and settled on a price per share in the low $40s. Facebook, on the other hand, came in with a much higher valuation of $104.2 billion but also issued shares in the same range as Twitter: $38.00. (Source: “Snap IPO: What Investors Need to Know,” NASDAQ, January 26, 2017.)
These are by no means the magic numbers, but it does show that the Snap IPO price per share will be a little unpredictable until we hit that magic date in March (if things go according to plan and the IPO isn’t delayed, that is).
So what is the Snapchat stock price? Check back in March.
For the investor itching to get in on some Snapchat IPO action, the next move is pretty simple: watch and wait.
With the filings set to release this week, you’ll have a good amount of reading material on hand that can help you get a better picture of the company and determine if this is the right stock for you.
Also be cognizant that IPOs are a tricky business that can often suffer from overhype. That doesn’t mean that a Snap IPO is doomed to suffer the same fate as past ill-favored companies but—perhaps more than most investments—a company going public is a particularly volatile period.
Whichever side you fall on, bull or bear, the Snapchat IPO will be one of the bigger events of 2017 in the tech stock market, and certainly the biggest so far this year.
With that in mind, enjoy the wild ride that is sure to take place over the coming weeks.