Snapchat owner closes up 44% for $28.3bn valuation
Messaging app revives era of hot tech IPOs as investors shrug off governance concerns
The US broke its long drought of big technology initial public offerings on Thursday as shares in Snap soared 44 per cent in their market debut despite questions about corporate governance and profitability at the owner of vanishing messaging service Snapchat.
A pack of traders huddled around the desk of Snap’s designated market maker for more than an hour after the opening bell at the New York Stock Exchange to strike the opening price, when cheers rang out across the floor. The IPO was priced at $17 on Wednesday afternoon — raising $2.5bn for the company and $935m for selling shareholders — with the shares opening at $24.
The shares traded in a $23.50-$26.05 band during the day before ending the session at $24.48, valuing the group at $28.3bn.
That makes Snap worth about two and a half times social media rival Twitter, and about the same as food manufacturer Kellogg, video games maker Electronic Arts and electronics company Panasonic. But it is dwarfed by its two main rivals for advertising dollars: Google, at $580bn, and Facebook, at $395bn.
Some 75m Snap shares changed hands at 11.35am New York time, when it began trading, the highest volume of any stock worth more than $50m on US exchanges, according to data from Bloomberg.
The IPO is being touted as a barometer for investor demand for tech listings, coming in a particularly slow period. Last year was the worst for US tech listings since 2009 and Snap is the largest US-listed tech IPO since Alibaba in 2014 based on amount raised and market capitalisation.
The latest hot tech companies, which also include Uber and Airbnb, have been able to raise billions of dollars at high valuations privately, creating the herd of so-called unicorns, or tech companies that have achieved valuations of $1bn or more without going public.
The enthusiasm for Snap came despite the decision by some portfolio managers to shun the stock over concerns about the company’s decision to issue shares with no voting rights, a first in the US, and to ensure control for the co-founders even if they leave the company.
In addition, some analysts questioned whether an app with no profits and fierce competition from other social media groups warranted such a lofty valuation. Last year the company recorded a net loss of $515m, up from $373m in 2015, on revenue of $405m.
Brian Wieser, an analyst at Pivotal Research, said Snap was “significantly overvalued” because of the competitive environment it faces, a mostly unproven business model and the risks to shareholders that they will be diluted because of “aggressive” share issuance to employees.
Mr Wieser issued a “sell” rating on the stock and a price target of just $10.
Snap’s co-founders rang the bell at the NYSE as they awaited the first trades of the IPO that has made them billionaires. Evan Spiegel, the 26-year old chief executive, and Bobby Murphy, the chief technology officer, dressed in smart suits and ties, unlike previous tech entrepreneurs who have preferred casual wear such as hoodies and T-shirts. NYSE president Tom Farley was also on hand, standing on the podium beside them.
Mr Spiegel’s fiancé, model Miranda Kerr, joined him at the NYSE, among a Snap entourage of about 100 people including employees, board members and family.
Outside the stock exchange, a large yellow sign reading ‘Snap Inc’ hung above the entrance. Inside, screens featuring Snap’s signature ghost icon hung above the NYSE floor, while Snap and NYSE staff sported Spectacles, Snap’s video sunglasses.
A Snapbot, a yellow vending machine that dispenses Spectacles, also appeared at the NYSE as a gift from the company, with a bunch of yellow balloons flying on top.
Snap also gave out spectacles to traders at their designated market maker, GTS, but they chose not to wear them so that the glasses would not accidentally reveal the order books.
Founded as an alternative to existing social media platforms, Snap allows for quick-fire exchange of “snaps” that disappear after 10 seconds.
Snap has added features including 24-hour collections of photos called “stories” and a platform for publishers where users watch news and entertainment called “discover”. Snapchat is selling itself as a place mostly for close friends, rather than acquaintances that fill Facebook and strangers that dominate Twitter.
Some 158m people open the app an average of 18 times a day, with 60 per cent of them sending a snap to a friend every day and 25 per cent creating a story. The largest age group is 18 to 24, a generation that advertisers are hoping to reach on mobile now that they do not spend much time watching TV.
Pre-IPO investors who will benefit from the offering stretch from venture capitalists Benchmark and Lightspeed Venture Partners to large tech companies Alibaba and Yahoo, and include a Silicon Valley high school. Saint Francis High School in Mountain View invested $15,000 in Snap’s seed round, after kids at the school were the first to tell a venture capitalist about the app.
John Colley, a professor at Warwick Business School, noted that the company faces significant challenges in competing with Facebook and Google, generates substantial losses and is suffering from slowing growth.
“Snap Inc is benefiting from institutions and individuals being awash with cash,” he said. “The top end valuation reflects high liquidity rather than a great prospect. There is far more cash than opportunities, which means pursuit of long odds risky options such as Snapchat.”