The Billion-Dollar Snapchat Story
The big event last week for Wall Street was the Snapchat Initial Public Offering (IPO). By selling 200 million shares for $17 each and raising $3.4 billion with a valuation of around $20 billion, everything seems to be going great for Snap Inc., the parent company of Snapchat. Based in Los Angeles, California, Snapchat is the first technology company that has gone public in the United States in 2017.
It is interesting to note that the IPO has been oversubscribed 10 times though its shares are non-voting shares. It is the biggest social-media listing since Twitter Inc. in November 2013. The stock started trading Thursday, March 2 on the New York Stock Exchange and closed at above $24. While Snapchat was still gaining traction among users in 2012-13, the markets and investors eagerly anticipated IPOs of two of the most popular social networks, Facebook and Twitter.
When Facebook launched its IPO in May 2012, it was the second largest IPO for any American company at that time. It traded lower than its first-day close for more than a year, at times falling to less than half the IPO price. Facebook finally recovered in late 2013, more than tripled and today has become one of the most valuable tech companies in the U.S.
If we look at Twitter’s IPO in November, 2013, after selling shares at $26, the price soared by 73 percent in the first trading session. Twitter shares stayed higher than the IPO price for nearly two years before concerns about its user growth became an issue for investors. Twitter is now trading below $16 and some analysts think it is probably worth $10.
Is Snapchat going to be both popular and profitable?
Investors are of all kinds; some choose to invest just for the IPO listing gains, while others buy after the whole IPO frenzy is over. While there is nothing wrong in the investment strategy of the former, if a large number of investors have the same plan, the stock prices could eventually fall. The latter is concerned about issues of performance, non-voting, among other parameters and sells shares unless the results are satisfactory. This will again bring down valuation.
Herd behaviour, the tendency of an individual to follow the rational, or often irrational decisions of a larger group, is not something the stock markets are unfamiliar with. So when I read about the anticipation surrounding these IPOs, I wonder, how much of it has to do with this inherent bias?
There was a lot of talk going around last month about the Snapchat IPO owing to its large following, with 158 million people using Snapchat every day. With all the press coverage and information available, people start making the judgment that it is more important than it really is (also referred to as the Availability Heuristic). Snapchat faces a giant competitor (in terms of user base and popularity) in the Facebook/WhatsApp/Instagram combination and it will be interesting to see whether Snapchat will be more like Facebook or Twitter in the future.
Update:
When I checked last, Snapchat closed on March 6 just below its Day 1 close, at $23.77.
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