SMITH BRAIN TRUST – When Jonathan Aberman thinks about Snap Inc. going public, the image that springs to mind is a queue of airplanes, waiting for takeoff, with the parent of the popular Snapchat photo app first on the tarmac. It's because Snap is the first in a line of so-called "unicorns" – privately held tech companies with an estimated valuation of $1 billion or more – that are expected to launch an initial public offering.
There are dozens of others, including home-sharing network Airbnb and ride-hailing app Uber. And this one, says Aberman, a lecturer at the University of Maryland's Robert H. Smith School of Business, has him feeling a bit wary about them all.
With its initial public offering, which is expected to launch next month, Snap is targeting a valuation between $20 billion and $25 billion. That makes the photo-sharing app (though Snap in its IPO filing refers to itself as a "camera company") pretty pricey. At its target valuation, investors would be paying some 62 times trailing sales for Snap. That's compared to five times the sales for Twitter, and 14 times for Facebook. And that's optimistic for a company that's not picking up new users like it used to.
"There is a lot of interest in these deals to see what happens," Aberman says. "And there are reasons to be concerned."
Snapchat's growth slowed by more than 80 percent at the end of 2016, as Facebook's Instagram added the Instagram Stories feature to compete with Snapchat Stories. The 5-year-old Snap posted a net loss of $514.6 million last year and a loss of $372.9 million the year before.
"Snap is a business that, when you really cut through it all, created a lot of its value because it's not Facebook," says Aberman. "It's the place that millennials went to when their parents and their grandparents and their aunts and uncles went on Facebook."
Now Snap faces an interesting challenge. How can it find millions of new users and still appeal to the ones who are using the platform to escape the cross-generational crowd?
Snap is sexy to advertisers because it gets higher levels of engagement from millennial consumers than YouTube, Twitter or Facebook do. But without broad user growth, can Snap achieve the sales volume it would need to support a $20 billion valuation? "I'm skeptical," Aberman says. "Right now users think it's really fun. It's free and their parents aren't on it. Once advertisers crowd to it, and parents and grandparents, will it stop being fun?"
Many experts, including P.K. Kannan, the Ralph J. Tyser Professor of Marketing Science at the Smith School, are encouraged by Snap's ability to engage teens and young adults, and its ability to keep them engaged. The company is already iterating, adding new photo filters and partnering with BBC to present a new "Planet Earth" documentary.
The No-Vote Shares
This part is believed to be unprecedented. Snap's IPO will consist totally of nonvoting shares, in a move that would effectively insulate the company against influence from activist investors and maintain a board that is dominated by insiders. "That, to my mind, well, I think it's arrogant," Aberman says.
Institutional investors – hedge funds and other major market movers – aren't wild about it, either. The Council of Institutional Investors has written a letter to Snap's founders urging them to reconsider.
Snap's move follows a recent pattern among tech companies seeking to hold on to corporate control, even while issuing shares. But this is more sweeping than what's been done by its tech peers. Facebook and Google's parent Alphabet have issued some special shares that come without voting rights.
The IPO Drought
Of course, these reservations might all be forgotten when Snap debuts on Wall Street next month. There hasn't been a tech IPO in months, and this one will likely be the biggest since Twitter listed in 2013. Investors are primed for this.
"The hype machine will work well and people will be excited," Aberman predicts.
The stock will be priced to capitalize on the hype and many of the shares will be sold in advance. "They will probably make good money here with the valuations," Kannan says. "Snap is focused on one segment, and that segment is increasingly alienated from TV and other platforms. Right now, advertisers are very happy with Snapchat."
How the stock is trading six months or 12 months after the listing, Aberman says, "is where the real story will be told." He says the stock will likely find itself overvalued and under pressure.
The Momentum Effect
The reason why this matters, Aberman says, is that Snap is at the front of the line of unicorn aircraft on the runway, waiting for takeoff. If Snap doesn't reach and hold its lofty, desired valuation, Aberman says "all the unicorns that are stacked up behind it will be harmed."
"Wall Street," he says, "is a place where momentum matters a lot."
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