This week’s IPO from Snap may well price at the top end of its range when trading gets under way later this week, with the deal said to be many times over-subscribed, showing that this particular IPO certainly has the power, and we could well see an opening pop as the share price looks to find its level in the first few days.
Trading when it gets under way is likely to be kind of hectic, but puns aside one can’t help feeling that this is one deal that could well end up with some investors getting burned.
Current estimations would suggest that a valuation of $20-$25bn as it looks to float at between $16 and $18 on the US stock market, which seems a lot for a company that has never made a profit and has actually seen losses increase, though on the bright side user growth is going in the right direction.
The valuation of up to $25bn in itself isn’t a particularly instructive number when it comes to the success of an idea as Twitter will no doubt testify, which means the company will need to be creative about how it monetises its growing user base.
While Snap would like you to think it is a camera company, the only camera it has is its wireless “Spectacles” which records 10-30 seconds of video, and sends it to the app on your phone and which costs about $130. Unfortunately for Snap the costs of making them currently come in higher than that.
As an alternative to Go-Pro they are much less cumbersome and much more fun in terms of how far wearable cameras have evolved and are evolving, however the question here is not how much fun they are but whether any investor will get their money back.
The company is better known for its Snapchat app and it is here that it will need to continue to grow its revenue base.
Snapchat’s digital advertising revenue has certainly grown quickly with the amount of revenue it has been able to generate from each daily user tripling in the fourth quarter of 2016.
Its main demographic appears to be a younger audience between the ages of 18-24, usually a fairly hard to reach social group, but there does appear to be some evidence that its user growth is starting to plateau in the wake of product enhancements to similar products like Instagram, which recently implemented a new feature called “Stories”
Looking at the numbers any prospective investors will be taking an enormous leap of faith on a company which is haemorrhaging cash; the company posted a loss of $370m in 2015, and a loss of $514m in 2016. This was despite a huge rise in revenues from $58.6m in 2015 to $404.4m in 2016.
It is true that innovation can be expensive but investors normally want to see some kind of return on their investment.
Of greater concern is that new shareholders will have no voting rights whatsoever in the context of the wider direction of the business. Some optimistic investors have suggested that Snap Inc could well be the new Facebook, while others have suggested it could end up like Twitter. Whichever way the share price goes most shareholders would still like to have some sort of say in how the business is run and it is this lack of accountability that is a major concern.
Time will tell, but one thing is clear, it will certainly need a lot more ad revenue to justify the current valuation, and while we know that three times Formula One World Champion Lewis Hamilton uses the app, after that famous press conference at the Tokyo Grand Prix last year, when he used a bunny filter, I’m not sure that is enough of an endorsement for a share offering, that is pricey in the extreme, that gives new shareholders no voting rights at all, and where profits seem a long way off.
I’d be more tempted to put some money on a rank outsider at the Grand National, your odds would probably be better.
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