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Snap IPO, the nexting Facebook

Snap’s IPO is a big deal

Snap could easily be the hottest new listing this year. Snap, the owner of the Snapchat messaging app is the first major social media IPO since Twitter and the largest tech debut since Chinese e-commerce giant Alibaba floated in 2014.

 

The desire to invest in the ‘next Google’ captures the imagination of every IPO investor. More recently Facebook, another social media company, has returned IPO investors nearly 2 ½ times their money. But IPO investing is fickle. The landscape is littered with the corpses of Facebook wannabe’s. The most high profile failure is Twitter, which has lost over half its value since it was listed.

 

The next Facebook or Twitter?

Given the relatively small group of publically listed social media companies by which to measure the future performance of Snap; comparisons with Facebook and Twitter are unavoidable. Snap investors would surely want it to be more of a Facebook than a Twitter.

 

One of the biggest hurdles to Snap being the next Facebook is Facebook. Facebook’s WhatsApp is the dominant messaging app and Facebook is ruthlessly integrating many of Snap’s features into its photo app Instagram. Facebook already has a captured audience through its main platform, which counts a quarter of the world population as monthly active users (MAU’s). Snap must innovate to keep its existing users loyal and entice new users.

 

Snap is innovating, but perhaps at the expense of its identity. It started as an app where users could share disappearing picture messages, morphed into a place to add collections of photos called ‘Stories’ and now the IPO refers to it as a ‘camera company’. Cameras and social media would bring it into direct competition with GoPro, another tech IPO that didn’t live up to expectations.

 

The China factor

Expectations for growth in China are dramatically lower today than when Facebook publically listed. WeChat is the dominant messaging platform in China. Tencent, the owner of WeChat has shown a canny ability to replicate features originally pioneered in US software, including Snapchat. Facebook founder and chief exec Mark Zuckerberg is doing his best cosy up to China in hopes of gaining access to its vast population, but government policy is clearly designed to favour domestic companies.

 

There is a ‘glass half-full’ take on the vast social media competition Snap faces. Facebook has already laid the groundwork for how advertising on social media can be profitable. Snap needs to repeat the advertising model already pioneered by Facebook, with its own unique flavour.

 

Of course Snap is over-valued

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. Facebook bought WhatsApp for the very similar sum of $19bn in 2014.

 

Snap’s revenue-growth over its five-year existence is very Facebook-esque. Revenues were up 600% in 2016, the question is whether a high growth rate can be maintained as the company matures. 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. ‘Unicorns’ (tech start-ups valued over $1bn) like Uber and Airbnb have opted to stay private, limiting the supply of publicly investable firms.

 

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

 

Key Details

- Price: $14-$16 per share

- Valuation: $19.5bn - $22.2bn

- Flotation Venue: The New York Stock Exchange (NYSE)

- Users: 158m DAU’s (daily active users) 

- Revenue: $404.5m in 2016

- Profit: $514.6m net loss in 2016

- Shareholders: Cofounders Evan Spiegel (CEO) and Bobby Murphy (CTO) and venture capital firms

 

 

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