Wall Streeters tomorrow will read Warren Buffett’s annual letter urging them to soberly invest in undervalued stocks with sturdy businesses. Then many will ignore his advice and join next week’s frenzy to snap up shares of Snapchat parent Snap Inc. in what’s expected to be the biggest tech IPO since Alibaba went public in 2014.
On Wednesday Snap will set the price of the shares it will sell to banks and big investors; it hopes to see $3.2 billion from an offering that would value the entire company at $22 billion. The shares should begin trading on the New York Stock Exchange on Thursday.
All signs suggest that buyers will join in a stampede for Snap shares, even though the company is less than six years old, has only been doing meaningful business for three years, and is still in the red.
The IPO is oversubscribed, Reuters reports. Tomorrow the New York Stock Exchange will conduct a test to be sure its computers can handle the expected orders.
It’s incredibly risky to bet on an ad-supported company that lost $514.3 million last year on revenues of $404.5 million. Indeed, it’s an “act of lunacy,” Bloomberg columnist Shira Ovide says.
But fans see a potential windfall if the company’s trajectory comes close to Facebook’s. It went public in 2012 at a value of $104 billion, and now has a market value of $389 billion.
Snap will create three classes of stock, enabling CEO Evan Spiegel and CTO Robert Murphy, both co-founders, to retain control. The IPO will sell non-voting Class A shares to the public.
Outgoing Sony Entertainment chief Michael Lynton is chairman of the Snap board and could see more than $48 million from the IPO.
Others in media will keep an eye on the company to see whether it takes users from Facebook, and ad dollars from the social media giant and TV networks.
Snapchat enables mobile users to transmit images, video and text that self-destruct in 10 seconds or less. Many users enjoy transforming images with what Snapchat calls its “lenses.”
Media companies including CNN, Vice, ESPN and Food Network have used Snapchat’s Discover channels to offer videos and headlines to fans.
Snapchat could see $1 billion from ads this year that “will likely come from brands looking to target the increasingly elusive 12 to 24 year old demo with dollars that could come out of TV,” MoffettNathanson Research’s Michael Nathanson says.
But he also sees a “clear risk” if growth slows in the number of daily average users. The company had 161 million DAUs worldwide in December, with 43% in the U.S.
Snapchat “may be unable to penetrate older users who are comfortable with their established social networks,” Nathanson says.
Pivotal Research Group’s Brian Wieser calls Snap “an upstart if there ever was one.” But he believes that it’s “better positioned to capture budgets that would otherwise go to television than Facebook or Twitter.”
Last year Snap lured Jeff Lucas from Viacom, where he ran sales and marketing for the Media Networks, to to take charge of global ad sales.
“User and usage growth is one of the most significant wild cards,” Wieser says.
Nomura Instinet’s Anthony DiClemente also notes that Snapchat’s average revenue per user numbers are “well below those of competitors, which could indicate a long runway for expansion.”
All told, “it’s unclear what share of user time spent is well suited for ads, and to date, we have yet to see a very clear ad monetization model for messaging platforms.”