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Snap Inc prices IPO above expected market range

Thursday, March 2, 2017 3:31
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Snap Inc., the owner of mobile app Snapchat, has priced its shares at $17 each ahead of its listing on the New York Stock Exchange later today.

The flotation of the business, founded by Evan Spiegel and Bobby Murphy, values the business at $24bn after the issue of 200 mln shares.

The initial public offering (IPO), which will raise $3.4bn, was 10-times over-subscribed. 

Snap had a target range of $14 to $16 per share before last night’s IPO, which some analysts felt may be overvalued considering it has never made a profit.  

London Capital Group analyst Jasper Lawler said: “The valuation for what is basically a smartphone messaging app looks eye-watering on first glance. At over 50 times current sales, Snap is very pricey compared to Facebook at 14 times.

“But buying potential can work; Amazon shares are near record highs and trade at 100x forward earnings. If Snapchat can grab even a slither of Facebook and Google’s ad revenue it might be worth it.”

The popular mobile app, which allows users to send photos and videos that disappear shortly after being sent, widened its full year net loss to $514.6mln in 2016 from $372.9mln in 2015.

Still revenues jumped to $404.5mln from $58.7mln the previous year. On average, 158 mln people use the app daily with more than 2.5 mln Snaps created each day.

Worthwhile investment?

Snapchat has argued that the app’s revenue potential and popularity make it a worthwhile investment.

“Revenues were up 600% in 2016, the question is whether a high growth rate can be maintained as the company matures,” Lawler said.

“Even if it’s not worth the price tag, Snap stands to be in high demand anyway because investors have been so starved of high-growth potential IPOs.”

Meanwhile, Snapchat’s IPO has raised concerns that new shareholders will have no voting rights on the direction of the business.

Spiegel and Murphy will maintain tight control over the group’s stock through a three-share class structure, which will give them the right of 10 votes for every share. Existing shareholders will have one vote for each of their shares.

Rich valuation

Snap’s valuation is the richest for a US tech flotation since Facebook in 2012.

Facebook’s flotation was considered a disaster at the time as its shares fell below the $38 per share offering price shortly after the event. The social media outlet’s shares closed at $26.81 per share a week following the IPO. Shares have since recovered, currently trading at $137.42 each.

In contrast Twitter’s IPO in November 2013 started off well but has lost value since.

The social network’s IPO raised $1.82bn in November 2013 after selling 70 mln shares at $26 each, above the offer price of $23 to $25 each. The company’s shares are now worth just $15.79 each.

“With all said and done, we would envisage the share price of Snap developing more like Twitter than Facebook; initial enthusiasm fizzled out with misspent potential,” Lawler concluded.

ETX Capital analyst Neil Wilson believes Snap’s shares look set to fly when they begin trading in the US. However, trading could be choppy with pricing high and selling low, he said.

“Big institutional funds will step in to the main market to add to their holdings, forcing up the price,” he added. “We’ve also seen huge retail client interest in Snap shares – this is as big as the Facebook IPO in terms of the hype and buzz around it. It’s also got to help bring more unicorns to the public table – Uber for instance.”

– Adds analyst comment –

Story by ProactiveInvestors


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