Who knew dog ear filters could be so highly-valued?
Snap Inc., the parent company of popular social media app Snapchat, made its highly anticipated debut on the New York Stock Exchange on March 2. True to the hype, the company’s stock price soared throughout its first day and shares closed up 44 percent.
But investors want to know whether the surge is just hype associated with a highly publicized IPO (initial public offering). Does the Snapchat burst signal a trend toward more big IPOs for similar companies, or is its stock simply overvalued? It’s hard to tell, but experts are taking the company seriously — and enjoying the show.
“The Snapchat IPO allows every investor to participate in the early days of one of the leaders in mobile and online video,” says Tom Taulli, analyst at InvestorPlace. “This hasn’t really been the case for some time. Other high-profile IPOs, like Facebook, had been around for a while before hitting the markets. For the Snapchat IPO, this means the risks are high. But if the company can wind up being in the league of Google or Facebook, then there is definitely lots of room on the upside.”
Is Snapchat Overvalued?
“Of course it is,” says Kim Forrest, vice president and senior analyst at Fort Pitt Capital Group, a wealth management firm based in Pittsburgh. “Because it has no earnings and a negative cash flow… many of the usual metrics that we use to value stocks do not work for this company.”
Essentially, when you purchase shares of a company’s stock, you are buying a portion of the company’s future cash flows, Forrest says. But Snap has told investors it cannot predict when it will have positive cash flow. In the risks section of Snap’s filing with the Securities and Exchange Commission, company leaders wrote: “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”
While the stock is overvalued by any traditional metric, many investors still believe it’s worth the risk. Without earnings, there’s no way to determine a price-to-earnings ratio, (the ratio of current share price to per-share earnings), but the company does have revenue.
“As for revenues, they could hit $1 billion this year,” Taulli says. “Based on this, the price-to-sales multiple would be a sky-high 30 times. But when it comes to early-stage IPOs, the valuations are usually stretched anyway.”
Does Snap Signal a New Trend?
Snapchat’s successful IPO may lead to more successful public debuts for similar companies, Taulli says. “For IPOs, there are windows in which the environment is right to do deals,” he explains. “And we’re certainly in one right now. The markets have been in the bull mode and there has also been a dearth of offerings.”
What other tech companies might we see making an IPO soon in the Snapchat vein? Possibly Uber, Airbnb and Dropbox, Taulli predicts.
Based on the performance of the Snap stock and the strong demand for the shares, it’s clear to see that “the investing world is hungry for this sort of issue,” Forrest says.
But she’s not sure whether this is a good thing for investors or for the company. “I’m old school,” she says. “[I think] companies should show they love their shareholders by growing and being profitable—at the same time. But in this realm, that’s crazy thinking!”