Will Snapchat’s IPO Pay Off for Investors?

Snapchat’s first public shares went for sale on Thursday and the stock price has already risen by almost 50 percent. Thus begins the expected IPO flood of 2017. Several major companies are expected to issue shares this year, including Spotify and Uber. However, investors have become warier than ever about buying shares for companies that can’t back up their name recognition with profitability. Has the time come for the return of the IPO?

Will Snapchat’s IPO Pay Off for Investors?

 

IPOs Hit a Low in 2016

Some industry analysts consider 2016 to be the worst year in almost two decades in terms of public share debuts, with only 100 new companies issuing stocks. For comparison, 170 companies joined those offering stocks to the public for the first time. As a sign of the downward trend, 2014 had almost 300 IPOs. A major theme of IPO share pricing in 2016 was that the opening price was significantly below market expectations.

Selectivity Breeds Improved Performance

The actual performance of the companies that went public was better than average, however. By the end of the year, 70 percent of the stocks first issued in 2016 were trading above their initial share prices. According to Kathleen Smith of Renaissance Capital, an international Investment banking firm, this streak of good performance is due to the investors. “It’s been a market where IPO investors have made good money, and that is because investors have been demanding attractive prices from the issuers.”

Snapchat Sets a High Share Price

Snapchat’s parent company, Snap, broke from this tendency towards undercutting pricing and actually set its initial offering above market expectations. Investors had originally been preparing for an opening price in the range of $14 to $16. It seems excitement about the IPO convinced Snap to reconsider. The company put 200 million shares up for sale at $17 each, and by the close of trading on Friday, buyers bid the price up to $24. In an attempt to keep its share prices high, a quarter of the shares put up for sale had an associated clause that prohibits putting the shares back on the market for a period of one year. A selloff is a serious threat for technology stocks, and 80 percent of tech IPOs see a price drop within a year of going public.

Soaring Stock Prices without Profits?

Snapchat is particularly vulnerable, as they have not yet achieved profitability. In fact, in the paperwork filed as part of its IPO, Snap admitted that the company lost more than $514 million in 2016, and that there is a possibility that it may never sustain long-term net gains. In the five years that the company has been in business, it has yet to post a revenue positive year. Economists are sounding an alarm about the wisdom of investing heavily in a company that is currently valued at five times its projected revenue for the next three years.

Can Snapchat Increase Its User Base?

Snapchat is promoting its user growth, which last year reached 48 percent as the key driver of its valuation. Admittedly, this dwarfs the new user rate of its nearest competitor, Instagram. Still, Instagram’s user base is nearly three times that of Snapchat, and Instagram has a more diverse membership. For example, Snapchat’s key demographic, adults between the ages of 19 and 35, makes up only a quarter of the population in the United States. And most of the people in that age group have already been exposed to the app.

The Outlook for IPOs in 2017

Snapchat’s performance may set the future of IPOs in 2017. Shared transportation company Uber considered going public this year. However, recent bad press regarding allegations of sexism and a pending lawsuit with Google could delay the IPO. Music streaming company Spotify is like to delay their IPO until 2018. The company is seeking to renegotiate better royalty and licensing deals with the major music companies. While both companies have internal business reasons for postponing their share offerings, it’s likely that many companies are waiting to see how Snap fares, and whether the company will continue to see skyrocketing share prices.

How Does the Snapchat IPO Affect Trading?

Snapchat is currently the largest IPO valuation since Alibaba went public in 2014. The rapid share price hike makes it likely that the company will be added to the S&P 500 by 2018. Although it is not directly affecting the performance of the American indices, it may lead to optimism for stock investors. It seems that people are once again willing to take risks on technology stocks. The strong performance of the company also bodes well for the U.S. economy. This should lead to a rise in the dollar. Facebook stock might take a small hit, as the company owns Instagram, Snapchat’s major competitor.