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)
Copyright (c) 2017 Dow Jones & Company, Inc.
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