The IPO has changed.
When I first started working for a major brokerage firm in the late ‘90s, the IPO was the hot thing. I could mention those magical letters, and while the person might not be able to tell me what IPO stood for — initial public offering, in case you didn’t know — he or she knew that those three letters equaled big money.
Before the dot-com bubble popped, IPOs regularly shot to triple-digit gains in their first day of trading and continued to soar. In 2000, there were more than 400 IPOs and many with wild returns.
But the Internet bubble popped.
And then years later, the housing bubble popped.
In 2016, there were only 106 IPOs.
But there’s a stable of companies that are poised to hit the market. Called unicorns because they’ve attained the near-mythical status of a $1 billion valuation for a private company, these companies have found a way to tap into the most powerful force in the economy, and they are lining up to bring that wealth to Wall Street.
That first unicorn has announced its plans, but is Wall Street ready to accept a revival of the IPO?
At the Head of the Herd
Snap Inc. — home of social media giant Snapchat — officially announced on Thursday that it is going to conduct an IPO. In its filing, the company is looking to trade on the New York Stock Exchange under the proposed ticker symbol of SNAP.
With this offering, Snap is looking to raise $3 billion, with the offering expected to be valued between $20 billion and $25 billion.
One definite benefit of going public is that a veil has at last been lifted on the company’s finances. Snap revealed that its revenue jumped 589% in 2016 to $404.5 million. However, its net loss also increased from $372.9 million in 2015 to $514.6 million.
While the company is burning through cash at an alarming rate, one tempting thing that will keep investors’ attention is Snap’s target users. The company’s filing revealed that Snapchat has 158 million daily average users and that an average 2.5 billion “snaps” are created each day.
The majority of users are aged 18 to 34 — or as Paul has pointed out in his articles, millennials.
Snap reports that on average, its daily active users visit Snapchat more than 18 times a day and spend 25 to 30 minutes on the platform.
Considering that 98% of Snap’s revenue comes from advertising, those steady impressions from Snap’s 158 million daily active users promise to keep revenue dollars rolling in.
Furthermore, Snap wants to gain a bigger chunk of the global advertising dollars, which are expected to expand at a 4.1% annual rate from $652 billion in 2016 to $767 billion in 2020. The company is forecasting mobile advertising segment annual growth of 31.2% from $66 billion to $196 billion in 2020.
Grumbles From the Street
Despite Wall Street’s love for tech and Silicon Valley, Snap has already won more than its fair share of skeptics with headlines such as “3 Reasons to Punt on Snap’s IPO” and “Snap’s IPO to Be Haunted by Twitter and GoPro” hitting this week from Forbes and Bloomberg, respectively.
Part of the disdain is born out of concern for the company’s increasing operating loss.
And part is from increased competition from Facebook’s Instagram, which is expected to surpass Snapchat in terms of market share.
However, there’s a good chance that Wall Street just feels slighted by the fact that the founders don’t want to give shareholders any say in how the company is run.
Snap’s IPO will establish three classes of shares.
- Class A shares — which are what you usually see in trading — will have zero voting rights. In addition, Class A shareholders will be unable to raise concerns at annual shareholder meetings, nor will be they be able to nominate directors.
- Class B shares will have one vote per share.
- Class C shares — which will be held by founders Evan Spiegel and Robert Murphy — will have 10 votes per share. As a result, they will hold 87% of the voting power.
This trick for concentrating power among the founders certainly isn’t new. We saw the same thing done by Facebook, Google, LinkedIn and Zynga, to just name a few.
While Wall Street might have its feelings hurt over the fact that it can’t effectively meddle in the workings of Snap, the question comes down to whether it really matters to investors. For the most part, investors purchase shares of a company to make a profit, not vote at the annual shareholder meeting.
Harnessing the Power of Millennials
While widely anticipated, Snap’s road to IPO is already off to a rough start for this unicorn.
But this certainly isn’t the only opportunity that’s going to hit the market this year. Many are expecting Snap to kick open the doors for several other hot unicorns to come stampeding to Wall Street such as Uber, Airbnb, Spotify, Blue Apron and Pinterest.
The key thing to look for with many of these companies is that they have managed to successfully tap into the millennial generation. With more than 92 million members, companies who can capture the attention of this group stand to make enormous profits.
These are exactly the kinds of explosive opportunities that Paul is going to look for in his new Extreme Fortunes trading service. (If you would like to learn more about this service, make sure you’ve signed up for the exclusive Extreme Fortunes Summit webinar that is happening on Tuesday, February 7.)
For 2017, Snap is only the beginning, and you don’t want to miss out.
Sr. Managing Editor, Sovereign Investor Daily