Snap leaps 44% in trading debut even as concerns over its growth threaten rally

Snap Inc. surged 44 per cent in its stock market debut, valuing parent of disappearing-photo app Snapchat at more than US$28 billion.
Snap Inc. surged 44 per cent in its stock market debut, valuing parent of disappearing-photo app Snapchat at more than US$28 billion.PHOTO: BLOOMBERG

NEW YORK (BLOOMBERG) - Snap Inc. surged 44 per cent in its stock market debut, valuing parent of disappearing-photo app Snapchat at more than US$28 billion.

That's a vote of confidence in the company's ability to grow quickly and fulfill 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 Google's YouTube.

Even so, some analysts are already betting the rally won't last: Two have already given the shares a "sell" rating, one with a price target of just US$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, drumming up skepticism for 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 chief executive officer 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 US$38 apiece in 2012 and now trades around US$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 shares closed at US$24.48, leaping from get-go from its US$17 IPO price, giving the company a market valuation of about US$28.3 billion.

More than 200 million shares - the entire size of the offering - changed hands over the course of the day, accounting for roughly 10 per cent of the total volume of trading on the New York Stock Exchange (NYSE) on Thursday.

It was the biggest social-media IPO since Twitter more than three years ago, and the first tech company to list in the US this year.

At the IPO price, Snap had a market valuation of about US$20 billion, implying a multiple of about 21.4 times EMarketer's estimate 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 Inc.

Snap, which posted a net loss last year of US$515 million, even as revenue climbed almost sevenfold, has plenty to prove. It needs to continue to increase revenue per user and address slowing user growth - which fell below 50 per cent 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 and the risks associated with executing against that opportunity." He gives Snap a sell rating.

Away from execution risk, the company also needs to convince investors to put their complete trust in its management. Snap listed non-voting shares, the first company to do so in the US, according to its deal filing. That means stockholders will have no sway over things like director nominations and executive compensation, and won't be able to bring matters before the annual meeting. Co-founders and majority holders Spiegel and Bobby 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 has been built up from nothing in about two years, advertisers have said that the ad-buying process is still overly complicated. They're also concerned about only being able to access a narrow demographic through Snapchat - its core user group of teens and twenty-somethings.

The aftermath of an IPO is always a game of expectations, with companies measured against what they promised in pre-listing presentations. Snap's pitch to investors is distinctly different from Facebook's or Twitter's. While those companies emphasized 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 maker per user.

"The company has done a good job setting expectations at the right level," Hemant Taneja, a managing director at General Catalyst Partners, said on Bloomberg Television. His venture firm invested in Snap.

Still, it will be difficult to escape the comparisons. Facebook, with about 1.2 billion active daily users on its flagship platform and 1.2 billion monthly users on its messaging tool 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.

When it comes to what happens next, Snap will be keen to follow Facebook's trajectory over that of Twitter.

Following a first-day trading technology glitch, Facebook climbed less than 1 per cent and languished for more than a year. Once the company's strategy of betting on mobile software started to pay off and revenue and profit exceeded estimates, it surged: The company now has a market valuation of about US$395 billion.

Twitter, on the other hand, had an impressive early run after its 2013 IPO, then proceeded to stumble as user growth slowed. With more than 300 million monthly active users, the site is valued at 4.8 times projected revenue - and with a market valuation of about US$11.5 billion is already significantly smaller than Snap.

Snap faces what those companies 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 emphasize that it will eventually be a portfolio of many products, like its Spectacles video-capturing glasses, and other experiments to come.