Snap Inc., maker of the disappearing photo app that relies upon the fickle favor of millennials, jumped in its trading debut after pricing its initial public offering above the marketed range. Shares opened at $24 and traded as high as $25.42 apiece Thursday, giving the company a market valuation of about $29 billion, based on the total number of shares outstanding after the offering in the deal prospectus.
Snap sold 200 million shares in its IPO at $17 each, above the $14 to $16 marketed range. Its market valuation at the IPO price, of about $20 billion, implies a multiple of about 21.4 times EMarketer’s estimate for Snap’s 2017 advertising sales. Snap went public at a valuation at least twice as expensive as Facebook Inc., and four times more costly than Twitter Inc.
“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 LLC. “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.
Snap raised $3.4 billion in its IPO, in the biggest social-media IPO since Twitter more than three years ago. It’s also the first tech company to list in the U.S. this year.
After ringing the stock exchange’s opening bell Thursday, Chief Executive Officer Evan Spiegel and co-founder Bobby Murphy headed to Goldman Sachs Group Inc.’s offices in lower Manhattan to await the first trade, according to a person familiar with the situation. Shares opened almost two hours later.
Goldman Sachs and Morgan Stanley led Snap’s offering, and Goldman Sachs is also the stabilization agent, tasked with ensuring the first day of trading goes smoothly.
“There is a huge amount of people who really just want to get in on the hot new thing, who see this as the first opportunity of its type in a number of years,” David Kirkpatrick, chief executive officer of Techonomy Media, said in an interview on Bloomberg TV. Still, “they’ve got some serious work to do to actually make a real business that makes profits.”
The company also needs to convince investors to put their complete trust in its management: It listed non-voting shares, the first company to do so in the U.S., according to its deal filing. That means stockholders will have no sway over things like director nominations and executive compensation, and they won’t be able to bring matters before the annual meeting. Co-founders and majority holders Spiegel and Murphy will be responsible for the decisions that lead to Snap’s success — or on the hook for its mistakes.
Snap, which posted a net loss last year of $515 million, even as revenue climbed almost sevenfold, has some things to prove. It needs to continue to increase revenue per user, address slower user growth — which fell below 50 percent in the fourth quarter for the first time since at least 2014 — and inch closer to profitability.
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 Snap — its core user group of teens and twenty-somethings.
Facebook, with about 1.2 billion active daily users on its flagship platform and 1.2 billion 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.
Facebook priced shares in its IP0 at the top end of the proposed range in May 2012, then following a first-day trading technology glitch the stock climbed less than 1 percent 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, and Facebook now has a market valuation of about $397 billion.
Twitter, with more than 300 million monthly active users, comes in at 4.8 times projected revenue. The social media site had an impressive debut, then proceeded to stumble as user growth slowed.
Snap faces what those companies faced, with one proven product to date under its belt.
The company offered the shares in its IPO for $14 to $16 each. Orders for the offering were concentrated at about $17 to $18 a share, people familiar with the process said Tuesday. Demand outpaced the number of shares being offered by a multiple of 10, people familiar with the situation said.
Including unexercised stock options and other convertibles for a total of 1.39 billion fully diluted shares, Snap would have a fully diluted value of about $23.6 billion, according to a person with knowledge of the matter, who asked not to be identified because the information is private.
Given the interest, Snap could have priced the shares at $19 each, the person said, but executives wanted to ensure that shares would make a decent gain in their debut.