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By Corrie Driebusch and Maureen Farrell 

Investors are preparing a barrage of questions for Snap Inc. executives ahead of the company's cross-country pitch, which could begin as soon as Friday.

Investors for months have been sizing up whether the company, known for its popular disappearing-messaging service, has a chance at becoming a social-media behemoth like Facebook Inc. Snap in its initial public offering is planning to seek a target valuation of up to $25 billion, The Wall Street Journal has reported, which would make it the largest U.S.-listed tech offering since Alibaba Group Holding Ltd. priced its IPO in 2014, according to Dealogic.

The dearth of IPOs in the past year, in tech in particular, means there could be pent-up demand for new stock offerings. AppDynamics Inc., slated to be one of the first tech IPOs of the year, was scooped up by Cisco Systems Inc. on the eve of pricing its offering last month.

Many investors, however, say they aren't yet sold on Snap. They want answers on the company's slowdown in daily user growth, its ability to take on established competitors such as Facebook and the implications of the near-total control 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. But nearly a dozen fund managers and analysts from across the country, 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 invests in the IPO. "Their strategy is going to have to fit that knowledge."

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 describes 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.

Chief among the concerns: 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 private companies. He added that before looking at Snap's S-1 filing, 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 18-34 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.

"At the end of the day, 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 wants to hear more about how Snap will 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's stories, 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 wants the company to address an elephant in the room.

"If daily active users flatten, that's what took Twitter down," he said.

When Twitter made its debut, the number of monthly active users had grown 6%, 7% and 10% in the prior three quarters. In the past year through Sept 30, Twitter's user growth has fluctuated between zero and 1.7%. Twitter shares fell 12% after the company reported its 10th consecutive quarter of slowing revenue growth on Thursday, though 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 are most focused on the company's financials and growth prospects, an unusual ownership structure is hanging over the company's roadshow. Snap will issue nonvoting shares in its IPO, which the company said was unprecedented for a U.S. IPO. Co-founders Evan Spiegel and Bobby Murphy currently hold about 89% of the voting shares.

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.

Write to Corrie Driebusch at corrie.driebusch@wsj.com and Maureen Farrell at maureen.farrell@wsj.com

(END) Dow Jones Newswires

February 12, 2017 12:46 ET (17:46 GMT)

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