Snap Looks to Raise $3 billion in March IPO

Snap’s IPO is poised to be the largest US-listed technology debut since Alibaba in 2014

Snap Inc., the maker of photo-sharing app Snapchat, has filed for its much-awaited IPO with the US Securities and Exchange Commission on Thursday, February 02nd, 2017. The company is looking to raise $3 billion in its March 2017 IPO and will trade on the New York Stock Exchange under the symbol “SNAP”. Snap’s IPO would represent the largest US-listed IPO by a technology company since Chinese ecommerce giant Alibaba Group Holding Ltd. (NYSE: BABA) went public in 2014.

As per its IPO filing, Snap’s net revenue was at $404.48 million in 2016, up from $58.66 million in 2015. However, net losses widened to $514.64 million in 2016 from $372.89 million in 2015. Losses from operations also widened to $520.39 million in 2016 versus $381.73 million in 2015. The company also stated that it had 161 million daily active users (DAUs) as of December 2016, of which 60 million daily active users in the US and Canada. On the other hand, Instagram had 400 million DAUs, leaving Snap with a lot of catching up. Another key metric, average revenue per user or ARPU, was at $1.05 in the December quarter ($2.15 in North America), in comparison with Facebook Inc.’s (NASDAQ: FB) ARPU of $7 per daily active user. Snap had 1,859 employees on its rolls as of December 2016.

Snap said its advertising business is growing quickly. It reported $58.7 million in revenue for 2015, which grew to $404.5 million in 2016. With the Company steadily adding advertising and sponsored content to its messaging service, advertising revenue is predicted to jump to $1 billion in 2017. The Company has a diverse revenue stream since no single advertiser or content partner accounts for more than 10% of revenue, the filing said.

User demographics

The IPO filing also revealed key data about the user demographics. The Company stated that the majority of its users are 18-34 years old, and the app is more popular among teens. This demographic is less brand loyal and more likely to follow trends than other demographics, a cause for concern given that Snapchat also may not be able to penetrate other demographics in a meaningful manner. Snap also said that users who were 25 years and older visited Snapchat approximately 12 times and spent approximately 20 minutes on Snapchat every day on average in the quarter ended December 31st, 2016, while users younger than 25 visited Snapchat over 20 times and spent over 30 minutes on Snapchat every day on average during the same period.

Snap’s IPO also comes just as the company’s core property, Snapchat, comes under fire from Facebook’s Instagram. Recently, Instagram launched its copycat version of Snapchat Stories called Instagram Stories. Moreover, Snapchat has never courted the celebrities and influencers on its platform in the same way Twitter, Instagram, and YouTube have. Its core utility lies as much in peer-to-peer messaging as one to many broadcasting. Analysts believe that Snap may emphasize the growing engagement of its core user base, preferring that metric to the total size of its audience or the view count on high-profile stories.

Co-founder control stockholder decisions

For its IPO, Snap will use multiple classes of stock to consolidate strategic control among a few key executives, mostly with co-founders Evan Spiegel and Bobby Murphy. The Class A shares will have no voting rights; the Class B will have one vote per share; and the Class C will have 10, marking an unprecedented move in a US IPO. Spiegel and Murphy own the Class C stock, giving them control over key matters submitted to stockholders for approval, such as decisions regarding a merger or acquisition that other shareholders might support. The two currently hold about 89% of the voting shares, according to the filing.

As a result, Spiegel and Murphy can avoid losing power while raising capital. Spiegel and Murphy each own 20% of Snap, according to the prospectus. Based on a valuation that could reportedly reach $25 billion at the time of the offering, each of them would own shares worth about $5 billion.

Snap to use Google’s Cloud services

Snap plans to spend $2 billion over the next five years to use with Alphabet Inc.’s (NASDAQ: GOOG) cloud-computing services, according to its IPO filing. The social media firm also listed its dependency on Google as a key risk factor that investors should consider before buying stock. Snap also said that it relies on Google’s services for a majority of its computing, bandwidth and data-storage needs. Hence, it warned investors that any disruption of or interference with its use of Google Cloud would negatively impact operations. The two companies signed an agreement in January 2017 for the five-year deal. Under the terms, Snap is required to spend at least $400 million a year on Google cloud services.

Alphabet is also an investor in Snap through CapitalG, its private equity arm, with an investment made in November 2016. Despite the investment, Snap may quickly become a rival to Google, since Snap’s grab for digital video marketing dollars pits it against Google’s YouTube. The two companies could also see a bigger standoff in software, since Snap could tap user data to offer granular targeting information to advertisers using Search services. In 2016, Snap hired top search engineer Wisam Dakka from Google and acquired a mobile search startup called Vurb. Snap could mine the search data and offer more targeted user information to advertisers, on similar lines to what Google does.

Snap could also start to use data-driven ads to spur more sales at physical retail stores, a big demand of marketers. The company has been testing internet-of-things prototypes including sensors and beacons, an area in which Google has been working with for years too.

Early backers set to rake in billions

Snap’s IPO looks set to deliver rich payouts to a long list of venture backers behind the Snapchat social media app. However, the two early investors that will benefit the most are Benchmark and Lightspeed Venture Partners. Lightspeed owns 86.6 million shares of the company, according to the IPO S-1 filing. Benchmark owns 131.6 million shares of Snap, having first invested $13.5 million in 2013 when Snap was valued at about $76 million. Benchmark could stand to gain $2 billion or more after the IPO. Benchmark’s General Partner Mitch Lasky is also a Snap director. Benchmark is also an investor in Uber Technologies Inc.

Benchmark’s shares in Snap are held in its $425 million seventh fund, raised in 2011. Lightspeed’s shares are held in its $675 million ninth fund, raised in 2012. Investors like Institutional Venture Partners, which led a mid-2013 round, will likely generate a return of 15 to 20 times the money it invested. In late 2013, Coatue Management invested when Snap was valued at about $1.6 billion.

An IPO valuation of over $20 billion would be significantly higher than Snapchat’s most recent valuation of $17.81 billion, based on a $1.81 billion financing round in May 2016. Some investors believe Snap’s IPO valuation could be as much as $25 billion, making for significantly higher returns.

Will Snap launch other hardware products?

After its foray into consumer electronics with the release a wearable gadget called Spectacles, Snap plans to expand into futuristic hardware products that use health sensors or advanced displays that may even warrant regulation from the Food and Drug Administration. Snap could use some of the proceeds from its IPO for acquisitions in augmented-reality or virtual-reality as it has done recently.

On December 25th, 2016, Reuters reported that Snap is buying Israeli augmented reality startup Cimagine Media for an estimated $30 million to $40 million. Cimagine has developed True Marketless Augmented Reality, a technology that allows users to virtually place furniture and appliances they wish to purchase in the space of their home, on their mobile devices, at the click of a button. Cimagine will become Snap’s R&D center in Israel and is expected to rapidly expand its workforce from its current 20 employees.

It remains to be seen if Snap could achieve the $20 billion to $25 billion IPO valuation that the Company is hoping for. If it does, it could be welcome news for an IPO market that has seen lackluster activity. In 2016, 26 technology companies went public on US exchanges, raising $4.3 billion, the lowest number and dollar volume since 2009, according to Dealogic.

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