Snap shares looked set to fly when they begin trading in New York on Thursday after being priced at $17, above its target range. With the Dow closing above 21,000 for the first time the IPO comes at an incredibly bullish point for US, and indeed global, equities. Of course such bullishness is reminiscent of the dotcom bubble and this could be a high watermark for the market.
The offer was 10 times over-subscribed, making a strong case for the stock to pop on the open. Big institutional funds will step in to the main market to add to their holdings, forcing up the price.
We’ve also seen huge retail client interest in Snap shares – this is as big as the Facebook IPO in terms of the hype and buzz around it. It’s also got to help bring more unicorns to the public table – Uber for instance.
But trading in Snap shares could have been choppy, pricing high and selling low. Facebook again is instructive – it endured a rocky start to life on the public markets, sliding from its IPO price before turning things around. Of course its IPO was beset by technical problems that the US exchanges are keen to avoid this time.
There is also a sense that the shares could be overpriced, based on some key fundamentals.
Bears can point to a decline in user growth and nearly $1bn in losses in the last two years that make its valuation look steep. At $17 a share, which entails a market capitalisation of $24bn, Snap would be valued at a ludicrous 61x sales.
The drop-off in user growth really does need explaining and needs to be turned around sharpish. Snapchat added 15 million users in each of the first three quarters of 2016, but this decelerated to just 5 million in the last quarter – the weakest increase since Q3 2014. The cash burn, which means it must boost revenues significantly, which entails some serious user growth. The big question is: how long will its teenager customer base stay loyal before they move on to the next thing? It’s also got a serious competitor in the shape of Facebook and its new Instagram Stories service which launched last summer and seems to be behind the drop-off in Snapchat user growth.
Bulls, meanwhile, point to its rapid sales growth – revenues rose 589% last year and according to Goldman Sachs it could be doing $2bn in revenues by 2018. Meanwhile at $17 a share, it’s priced at around 24x forward sales of $1bn this year, just a touch more than Facebook’s 19x when it listed.