Snap spectacular in market debut, but rally may not last
Snap surged 44 per cent in its stock market debut, valuing the disappearing-photo app maker at more than US$28 billion, but some analysts fret the rally from the first day of trading in New York may not last.
That valuation is a vote of confidence in the company’s ability to grow quickly and fulfil 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 scepticism 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 Inc. 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.”
Shares closed at US$24.48, giving the company a market valuation of about US$28.3 billion. Snap sold 200 million shares in its IPO at US$17 each, above the US$14 to US$16 marketed range. 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.
Spiegel and co-founder Bobby Murphy rang the New York Stock Exchange opening bell alongside exchange President Tom Farley. Unlike most executives on listing day, they didn’t hang around on the floor for the opening trade price to be set. Instead, they headed to Goldman Sachs Group’s headquarters about a mile away, according to people familiar with the matter.
Spiegel and Murphy didn’t want to do the typical circuit of post-IPO television interviews, one of the people said, asking not to be identified as the details are private. Instead, they wanted to be in front of the real action: Huddled around the fourth-floor trading desk of Goldman Sachs managing director Benny Adler.
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 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 gave Snap a sell rating.