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Snapchat parent company Snap Inc. is set to price its initial public offering, or IPO, on Wednesday, allowing investors to decide just how much the social media company is ultimately worth.
The company is seeking to raise as much as $3.2 billion and pricing shares at $14 to $16. That would value it between $19.5 billion and $22 billion. The deal is already oversubscribed, according to Reuters.
Tuesday's roadshow in New York drew a standing-room-only crowd of nearly 500 people that one attendee said included "the entire hedge fund mafia."
They raised questions about Snap's advertising revenue, slowing user growth, and competition with Facebook, among other things. Now the question is whether or not they and others will buy in.
We spoke to a handful of prospective investors and others close to the deal about the pros and cons. In most cases, these people declined to be identified because they were not permitted to speak to the press.
Below are the bull and bear cases for buying a piece of Snapchat.
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BULL: Snapchat's potential $22 billion valuation
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Snap's proposed valuation has raised some eyebrows on Wall Street, as people close to the company had for months floated the idea that it would be valued at up to $25 billion.
One person close to the deal, with a vested interested in seeing it succeed, told Business Insider that Snap is playing it safe with the intention of going higher as soon as demand merits. Conversely, asking for the full $25 billion and being forced to roll it back if investor demand isn't high enough would be a worse outcome that taints the company's trading debut.
Though the company said it was seeking to price shares at $14 to $16, this person said the only acceptable price, in reality, will be $16 per share or more. This person expects Snap's order book to be oversubscribed, meaning there will be demand for more shares than it is selling.
A hedge fund manager who attended the New York meeting told Business Insider "the bankers are being smart about the pricing."
"You could make the point it's too low, but the bankers are being smart enough about not having another Facebook," he said, referring to the famous plunge that Facebook's stock took in the months after its IPO before shares eventually recovered. "I think they’re pricing it at a very reasonable amount. Even if you’re skeptic, the valuation is coming out at a level where you almost have to look at it."
He added:
"If you're bullish, what you want to spin is at the end of day is that Facebook's market cap is $385 billion. Snapchat is coming about $20 billion enterprise value. When you think of enterprise value to opportunity set, it's a fairly palatable valuation ... A similar way to look at it as to look at Twitter as a comparison, with a $12 billion market cap. They have a user base problem, monetization problem and they’re still worth $12 billion. The premium that Snapchat is coming out as versus Twitter isn't that bad, for what I’d argue is a much better program."
BEAR: Snapchat's potential $22 billion valuation
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Still, not everyone is sold on Snap's valuation. GP Bullhound's Manish Madhvani Snap told Business Insider Snap represents a "very risky" investment.
Addressing Snap's valuation, Madhvani told Business Insider: "Is it worth that? I think you can see a clear path to where they're going to get to monetization of 1.5, 2 billion quite easily from what they are at the moment. But can they go massively beyond that? That's the bet you're really taking."
Snap had revenue of $404 million last year, and Goldman Sachs is forecasting that the company will hit $2 billion in revenue by 2018. Snap's net losses however deepened to $515 million in 2016, versus $373 million the year before.
Silicon Valley VC firm Goodwater Capital, which does not have a stake in Snap, estimates the red ink won't stop flowing until 2020.
Atlantic Equities research analyst James Cordwell wrote in a recent note that while the Snapchat app was an "impressive 'made for mobile' service" that was popular among young users, it would be difficult to expand its audience base beyond this demographic.
"With expansion beyond the core audience likely challenging, sustainability of engagement concerns to persist, and margins structurally lower than peers, we do not see upside to the $14-$16 IPO valuation range."
Another investor, who specializes in tech, put it this way: "I'm bullish in in the sense that I think Snap can be a multibillion company that generates lots of profits and revenue... But the question for me is if you're trying to go public at $22 billion and you have no profits today, if you're an investor, you really need to be compensated for that risk. You need it to be a $50 or $70 billion company for it to be worth it. I'm bearish on their prospects of getting to that level."
BULL: Snap's slowdown in user growth
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In the fourth quarter of 2016, Snap says it had 158 million daily users, an increase 48% from a year earlier. That's the slowest growth rate for any of the 12 quarters for which it reported numbers.
It's hard to make a bull case for a statistic like declining growth, but one person close to the deal laid out a counter-argument to those concerns. Essentially, this person said, Snap emphasizes quality of engagement over quantity of users. Spiegel wants existing users to really enjoy the product and is focused on innovating to make it more usable.
Part of that means users must have higher-end smart phones. Snapchat works best on iPhones, and while some problems persist on Android and other phones, Spiegel says he will not dilute the product to make it work on every phone. At the roadshow, Snap attributed the slowdown in growth to persistent problems with accessing the app on Android.
So unlike Facebook, which has nearly 2 billion users around the world, Snap is not focused on non-iPhone-using customers in places like the developing world because those markets are not easily monetized. The logic is that advertisers want to reach North America and develop Europe rather than the rest of world.
Goldman estimates that the company could grow its daily average users to 221 million in 2018, up from 158 million late last year, Business Insider previously reported.
See the rest of the story at Business Insider
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