Snapchat parent Snap, Inc. (SNAP) has priced its initial public offering of 200 million shares at $17 per share, which means the company is raising $3.4 billion. This gives the social media giant a value of $23.6 billion.
The pricing is slightly above the $14-$16 range the company had been targeting, which would have given it a valuation of $19.5-$22.3 billion.
As Bloomberg notes, the $23.6 billion valuation for the company is based on 1.39 billion fully diluted shares outstanding, more than the 1.16 billion shares the company’s filing indicates will be outstanding after the offering. This implies there are securities out there that can be converted into about 230 million new shares.
The debut of Snap, which in its prospectus called itself a camera company, not a social network, will be first tech IPO of 2017 and is the most highly-anticipated market debut since Alibaba. The last social media company to go public was Twitter back in 2013.
As Snap makes its debut in public markets, two issues are likely to be of concern for investors in the coming months and years: profits and voting rights.
Cost and user growth
In a post earlier this month, tech analyst Ben Thompson at Stratechery indicated that Snapchat has a burgeoning issue with its total costs per user rising and losses per user are also increasing.
“The biggest problem here is Snap’s cost of revenue per user: it’s going up, and it has been for a while,” Thompson writes.
“This isn’t quite as bad as it seems, because Snap’s cost of revenue includes revenue sharing payments to publishers; once you back that out, though, the company has gone from paying ~$0.47/user in 2015 to ~$0.66/user in 2016, a 40% increase, and an amount (per user) that well exceeds that of Facebook or Twitter at the time of their IPOs. That means that to become profitable Snap has to not only grow users, it has to grow them faster than its costs are increasing, or grow revenue per users by that much more.” (Emphasis added.)
The bull case for Snapchat, however, has been in the strength of its product team and the vision of its CEO Evan Spiegel. Innovation, then, is what’s really being pitched.
In its prospectus, Snap disclosed that user growth slowed towards the end of the third quarter of 2016 as the result, the company said, of issues related to new products and app updates.
This, then, would seem to indicate that the required product innovation Thompson sees as necessary for the company to overcome its current cost issues are also at risk of costing the company the users it needs to be profitable.
That’s why it’s called a risk factor.
No vote for you
As for the voting issue, Snap’s IPO will offer investors shares that have no voting rights.
In its filing, Snap said that Spiegel and co-founder Bobby Murphy will have control of 89% of the voting power at the company. “This concentrated control eliminates other stockholders’ ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial,” the company said in its filing.
“As a result, the market price of our Class A common stock could be adversely affected.”
In a post on Wednesday, Yahoo Finance’s Ash Bennington outlined why some analysts see this as making Snap’s shareholder structure “banana republic governance.”
In short, academic research says companies with a single-share class structure outperform those that feature the multi-class structure Snap will offer (and is currently offered by Google and Facebook).
Additionally, dual-class structures are not seen as being friendly for shareholder rights because, well, shareholders don’t get a vote. Sure, shareholders get a cut of future profits, but are also most junior in the capital structure and have no say in management. Then again, you don’t have to buy these companies.
The headline excitement around Snap’s debut is and will likely remain focused on the product itself and its wunderkind CEO. But one of the most interesting, if in-the-weeds, investment stories is also playing out.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland