Snap: The Best Way to Play its IPO
Crystal Kim, Barron’s
If you’re reading this blog now, you probably didn’t get shares of Snap(SNAP) at its offering price of $17. The parent company of the disappearing message app, priced its initial public offering of 200 million shares Thursday morning. It is anticipated to be the most high-profile and controversial Internet IPO of this year and there was plenty of optimism around the company ahead of its trading Thursday.
First Trust tracks an index that holds the 100 largest and most liquid IPOs in the IPOX Global Composite Index and caps exposure at 10%. Its rules-based index measures the performance of U.S. IPOs over their first 1,000 trading days and are selected based on quantitative screens. It’ll hold companies up to four years following their IPOs. Renaissance’s underlying index adds companies on a “fast entry” basis or on the fifth day of trading if it meets eligibility criteria or upon quarterly reviews and are weighted by market capitalization. Weights are capped at 10% and removed after two years. Global X tracks the Solactive Social Media Index, which holds a maximum of 50 companies weighted by market cap.
While Snap isn’t exactly comparable to Facebook (FB), investors who think Snap will trade like Facebook’s stock did in weeks following its 2012 IPO, FPX and SOCL may be more suitable. Remember Facebook’s IPO was something of a disaster and only traded above its IPO price in July 2013.
Rob Sanderson, managing director of MKM Partners thinks the revenue growth story is “very believable.” “The millennial is a coveted but elusive demographic for advertisers…We think there is optimism in Snapchat as a marketing platform and see strong support and enthusiasm from advertisers.” Snap’s focused demographic is a competitive advantage, says Sanderson.
Will it be monetizable? Sanderson’s thoughts follow:
The use-case for SNAP is both a communications utility and a content/ entertainment-oriented network. Communications apps on the Internet are not highly monetizable, but content/ entertainment driven apps have proven to be. We think the growth in Stories will be a key factor in the driving monetization.
Monetization on Snapchat is a fraction of the other networks, largely because the company only started selling ads a handful of quarters ago. Compared to Facebook, the monetization per user in 2016 was comparable to 2009 levels, when that network began to turn on its monetization efforts (in North America – Europe and R.O.W. are still a fraction of FB’s 2009 monetization).
We think the road for FB into advertisers was in many ways a harder sell than it will be for SNAP for three reasons: (1) the benefits of social media marketing are much more accepted to marketers in 2017 than in 2009, (2) there are proven ad units for marketers and established ad tech for SNAP to learn from and (3) the ability to reach younger demographics is much less effective in traditional media today than it was seven years ago. We think this will likely accelerate the monetization ramp of SNAP compared to the social networks that came before it.
Valuation, of course, remains the primary debate.
The deal is reported to be already over-subscribed and as IPOs often are, we expect the stock will be biased higher in the near-term after pricing. We are less sure about performance 4-8 weeks after the stock begins trading. We expect short interest will expand quickly, reflective of high valuation and an energetic Bear/ Bull debate.