Snapchat owner Snap Inc. hopes to fetch between $14 and $16 per share in its initial public offering this week but analysts think it may be overvalued.
The popular mobile app, which allows users to send photos and videos that disappear shortly after being sent, will price its offering after the US market closes tonight and will begin trading on the New York Stock Exchange tomorrow.
Snapchat will place 200mln shares and aims to raise about $3bn.
The IPO’s targeted range of $14 and $16 per share would value the stock between $19.5bn and $22.2bn. If Snapchat receives what it’s asking for, it would mark the highest valuation in a US tech IPO since Facebook in 2012.
However, some analysts believe Snapchat may be requesting too much.
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.”
Snapchat has tried to justify its suggested valuation by promoting the revenue potential of the app given its popularity among users, mostly aged between 18 and 34.
The company reported 2016 revenue of $404.5mln, compared to $58.7mln the previous year. On average, 158mln people use the app daily with more than 2.5mln Snaps created each day.
“Revenues were up 600% in 2016, the question is whether a high growth rate can be maintained as the company matures,” Lawler continued.
“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.”
Despite the increase in revenue, Snapchat widened its full year net loss to $514.6mln from $372.9mln in 2015.
Lawler also warned that he sees the share price of Snap developing more like Twitter than Facebook, with “initial enthusiasm fizzled out with misspent potential”.
Twitter’s IPO raised $1.82bn in November 2013 after selling 70mln shares at $26 each, above the offer price of $23 to $25 each. However, the company’s shares are now worth just $15.77 each.
In contrast, Facebook’s flotation in May 2012 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. Fast-forward to today and the shares have surged to $135.54 each.
Meanwhile, Snapchat’s IPO’s has raised concerns that new shareholders will have no voting rights on the direction of the business.
Founders Evan Spiegel and Bobby 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.
All in all, the general consensus among analysts is that investors will be taking a risk on pursuing a stake in the app, with an outcome that could swing in either direction of big rewards or major losses.
Story by ProactiveInvestors