The initial public offering has changed.
When I started working for a major brokerage firm in the late 1990s, going public was top of mind. I could mention those magic letters, and even though the person can’t tell me what IPO (initial public offering, in case you didn’t know), he or she knew those three letters equaled a lot of money.
Before the dot-com bubble burst, IPOs regularly soared to triple-digit gains on their first day of trading and continued to rise. In the year 2000, there were over 400 IPOs and many with great returns.
But the Internet bubble burst.
And then, years later, the housing bubble burst.
In 2016, there were only 106 IPOs.
But there is a stable group of companies that are ready to go to market. Called unicorns because they’ve achieved the almost mythical status of a billion-dollar valuation for a private company, these companies have found a way to harness the most powerful force in the economy and are lining up to bring that wealth to the Wall. Street.
That first unicorn has announced its plans, but is Wall Street ready to accept an IPO revival?
At the head of the pack
Snap Inc., home of social media giant Snapchat, officially announced Thursday that it will conduct an initial public offering. In its filing, the company seeks to list on the New York Stock Exchange under the proposed ticker symbol of SNAP.
With this offer, Snap is looking to raise $3 billion, with the offer expected to be worth between $20 billion and $25 billion.
One definite benefit of going public is that a veil has finally been lifted over the company’s finances. Snap revealed that its revenue increased 589% in 2016 to $404.5 million. However, its net loss also increased from $372.9 million in 2015 to $514.6 million.
While the company is burning through cash at an alarming rate, one enticing thing that will keep investors’ attention is Snap’s target users. The company’s presentation revealed that Snapchat has a daily average of 158 million users and an average of 2.5 billion “snaps” are created each day.
The majority of users are between the ages of 18 and 34, also known as millennials.
Snap reports that, on average, its daily active users visit Snapchat more than 18 times a day and spend 25 to 30 minutes on the platform.
Considering that 98% of Snap’s revenue comes from advertising, those consistent impressions from Snap’s 158 million daily active users promise to maintain revenue dollars.
In addition, Snap wants to earn a bigger share of global advertising dollars, which are expected to expand at an annual rate of 4.1% from $652 billion in 2016 to $767 billion in 2020. The company forecasts annual growth of mobile advertising segment from 31.2% from $66 billion to $196 billion in 2020.
street complaints
Despite Wall Street’s love of technology and Silicon Valley, Snap has already won its fair share of skeptics with headlines like “3 reasons to bet on Snap’s IPO” and “Snap’s IPO will be haunted.” on Twitter and GoPro” this week.
Part of the disdain stems from concern about the company’s mounting operating loss.
And part of it is due to increased competition from Instagram from Facebook, which is expected to overtake Snapchat in terms of market share.
However, there’s a good chance that Wall Street feels slighted by the fact that the founders don’t want to give shareholders any say in how the company is run.
Snap’s initial public offering will establish three classes of shares.
- Class A shares, which are what you normally see in trading, will have zero voting rights. In addition, Class A shareholders may not raise concerns at annual shareholders’ meetings, nor may they nominate directors.
- Class B shares will have one vote per share.
- Class C shares, which will be held by founders Evan Spiegel and Robert Murphy, will have 10 votes per share. As a result, they will have 87% of the voting power.
This trick to concentrate power among the founders is certainly not new. We saw the same thing done by Facebook, Google, LinkedIn, and Zynga, to name just a few.
While Wall Street may be hurt that it can’t meddle effectively in the running of Snap, the question boils down to whether it really matters to investors. For the most part, investors buy shares in a company to make a profit, not to vote at the annual meeting of shareholders.
Harness the power of millennials
While widely anticipated, Snap’s road to the IPO is already off to a rocky start for this unicorn.
But this is certainly not the only opportunity to hit the market this year. Many are hoping that Snap will kick open the doors for various other hot unicorns to stampede onto Wall Street, including Uber, Airbnb, Spotify, Blue Apron and Pinterest.
The key to looking with many of these companies is that they have managed to successfully tap into the millennial generation. With over 92 million members, companies that can capture the attention of this group can reap huge profits.
For 2017, Snap is just the beginning and you won’t want to miss it.