It’s the biggest technology IPO in two and a half years and Wall Street is giddy with excitement amid a booming stock market, which hit a new high on Wednesday. But when shares of Snap start trading on the New York Stock Exchange on Thursday morning, investors seem divided between those who are extremely enthusiastic about the app’s allure and naysayers who remain unconvinced about the company’s potential to grow its user base large enough to start turning a profit.
Snap, which will start trading under the symbol “SNAP,” will sell 200 million shares for $17 apiece on Thursday, giving it a valuation of almost $24 billion—with executives like CEO Evan Spiegel, cofounder Bobby Murphy, and early investors selling 55 million of their own shares and walking home with $935 million in proceeds. The share price is higher than the $14 to $16 a share previously sought by the company, showing that there is plenty of demand for a piece of the much-anticipated IPO.
“It is 5 times, if not 10 times oversubscribed,” Sean Stiefel, portfolio manager at Navy Capital, told Fast Company, adding that he put in a big order to buy shares in advance of the offering.
Not that all of those investors even understand Snap, as the company acknowledged in its IPO registration document filed last month when it included a tutorial full of drawings that show how the app works. One of the ironies of tomorrow’s IPO is that while its most active users are younger than 25, many of the professional investors who will be deciding whether to buy shares for their clients have never used the app and hardly understand it.
But they do understand that it could make them a lot of money. “The investors are just looking around to say ‘I guess it sounds good because everyone’s telling me it is,’” David Menlow, the president of SecondaryRatings.com, which rates IPOs and secondary offerings, told Marketwatch.
“I’m very bullish,” says Stiefel, who just got back from a trip to Israel, where he met with film companies. “The way the world is growing—the trend is toward images and not text—Snapchat is an innovator in that space. It’s at the edge of the next wave of social media.” He says that he’s not too concerned about competition from Instagram since “we’re very early in this trend” and Snapchat has proven to be an innovator and investors will “give it time to continue to prove that.”
Other investors have some concerns about Snap’s future. While it stands out by driving higher engagement and offers plenty of opportunities to sell ads to a coveted demographic, Snap needs to really grow in the next few years if it plans on making real money.
“My rule of thumb on such networks is that they need roughly 300 million users to be self-sustaining and to generate positive cash flow,” says Fred Baccanello, an investment manager at Dominion Asset Management. “They need to get to 300 million by 2018 and I don’t think it will happen—their user growth is slowing. And the market expectation is too high and probably unrealistic.
He also pointed out that international expansion is essential to its user growth, but that its software code doesn’t work well on simpler smartphones that are common in the developed world. “Tencent and Facebook have lite versions of their app and that helps them attract users in the rest of the world. I’m not sure if Snap can do that.”