Will Snap Pop? Investors Seem Skeptical
Investors raise questions over messaging-service parent’s performance and ownership ahead of multibillion-dollar listing
Snap Inc., parent of the hot disappearing-message app Snapchat, has a lofty valuation, hoards of coveted young users and social cachet. It also has a lot of Wall Street investors who aren’t buying the hype.
Ahead of the company’s pitch for its initial public offering, which could value it at $25 billion, investors are taking a sober look at the numbers. Among their concerns: a slowdown in daily user growth, competitors such as Facebook Inc. and the implications of near-total control that Snap’s founders will have post-IPO.
It isn’t unusual for prospective investors to try to find faults with a company ahead of a deal, to evaluate their own interest or even push bankers to lower the initial share price.
On Snap’s side is scarcity—2016 was the slowest year for U.S.-listed tech companies since 2009 in terms of number of deals and dollar volume, according to Dealogic. That factor alone could help support the shares in their debut.
Even Facebook, whose shares have soared in recent years, faced skepticism at the start. Its shares fell below their offering price soon after they began trading and only moved above it more than a year later.
Snap’s bankers now have to persuade investors they wouldn’t be buying into a fad. The roadshow could start as soon as Friday.
Nearly a dozen fund managers and analysts across the U.S., including several who focus specifically on tech, say they found Snap’s regulatory filing, made public on Feb. 2, frustrating and disappointing.
“It’s not a Facebook, nor do I think it’ll ever be a Facebook,” said Nabil Elsheshai, senior equity analyst at Thrivent Financial, who is considering whether to recommend that the mutual-fund firm invest in the IPO. “Their strategy is going to have to fit that knowledge.”
The skepticism is noteworthy, considering the fanfare that has surrounded highly valued tech startups in the past, as well as how long it has been since there was one of this size.
Snap in its IPO is planning to seek a target valuation of between $20 billion and $25 billion, The Wall Street Journal has reported, which at the high end would make it the largest U.S.-listed tech offering since Alibaba Group Holding Ltd. priced its IPO in 2014, according to Dealogic.
People close to Snap have reiterated their confidence that they will be able to hit their range.
Should Snap stumble in its debut, bankers, lawyers and investors say that could deter other tech companies from moving forward with IPOs. There were at least 154 private companies valued by venture-capital firms at $1 billion or more as of January, according to Dow Jones VentureSource, including ride-hailing company Uber Technologies Inc. and room-rental website Airbnb Inc.
Snap put off some prospective investors in the first line of its IPO filing: “Snap Inc. is a camera company.”
Fund managers said they found the description surprising because it implies Snap is a hardware maker, rather than what they consider to be a social network. Snap defines the camera as the screen that is the starting point for most products on smartphones.
Reading further down the document didn’t mollify investors, some said.
Many are concerned about slowing user growth, particularly since the rapid rise in popularity of the Snapchat social-messaging platform has been a top justification for the company’s valuation.
In the most recent quarter, Snap had 158 million daily active users on average, according to the company’s filing. That figure rose by 3.3% from 153 million users for the quarter ended Sept. 30. Daily active users grew by 7% in the third quarter from an average 143 million daily active users in the second quarter.
“The argument here is, ‘We’re going to build this huge audience and monetization will follow,’” said Rett Wallace, chief executive at Triton Research LLC, whose firm collects and analyzes data on companies. He added that before looking at Snap’s prospectus, many investors were hoping for answers about how to make money off Snapchat’s growing user base. Now there is a question about whether Snap can build that huge audience, he said.
Snap has attracted advertisers in part because of its coveted user base of teens and young adults. The majority of Snapchat’s users are 18 to 34 years old, according to the company’s filing.
Users 25 and older visited Snapchat about 12 times and spent approximately 20 minutes on the platform every day on average in the latest quarter. Users younger than 25 visited Snapchat more than 20 times and spent more than 30 minutes on Snapchat every day on average during that period.
“No matter how cool Snap’s users are, the advertisers will go black and white and look at the numbers,” said Paul Meeks, chief investment officer of Sloy, Dahl & Holst.
Mr. Meeks said he would consider the Snap IPO depending on the price, and wanted to hear more about how Snap would deal with building up daily active users and competing with Facebook.
Snap’s slowdown in user growth coincided with rival Facebook’s launch in August of Stories on Instagram—direct competition to a Snapchat feature which lets users create a series of videos and images that disappear after 24 hours. Five months after the launch, the new Instagram feature reached 150 million daily active users, Facebook Chief Executive Mark Zuckerberg said on an early February earnings call.
Mr. Meeks said he also wanted Snap to address an elephant in the room. “If daily active users flatten, that’s what took Twitter down,” he said.
When Twitter debuted, the number of monthly active users had grown 6%, 7% and 10% in the prior three quarters. In the 12 months through Sept. 30, Twitter’s user growth has fluctuated between zero and 1.7%. Twitter shares fell 12% after the company reported its tenth consecutive quarter of slowing revenue growth on Thursday, although the company said its daily user base jumped. Twitter shares closed Friday at $15.58 a share, down 40% from their IPO price of $26 apiece.
Though investors said they were focused on the company’s financials and growth prospects, an unusual ownership structure also hangs over the company’s roadshow.
Snap will issue nonvoting shares in its IPO, which the company said was unprecedented for a U.S. debut. Co-founders Evan Spiegel and Bobby Murphy currently hold about 89% of the voting shares. If either founder dies or is incapacitated, according to the prospectus, the other could control nearly all the voting power of the stock.
Some investors said they were put off by the structure, particularly those who said they don’t know the co-founders well enough to entrust them with so much power. These investors said they hoped the company’s marketing roadshow would provide an opportunity to warm up to the idea of concentrated power.
“When I see things like that, it doesn’t get me too jazzed,” Mr. Meeks said.