IPO stands for ‘initial public offering’. It marks the first time that shares of a privately held company are offered to the public. In early March, Snap, the company behind social media platform Snapchat, entered the stock market. Their entrance was not only much talked about because of the size of the flotation ($33 billion, if you will) but also because Snap had been cited as a loss-maker. Here, we’ll be looking at the reasons why a company may bring shares to the public marketplace, the overall process, in addition to Snap’s journey so far.
The Floatation Process
Companies can have several reasons for deciding to offer public shares, the main one being to raise capital. Often, companies reach a stage whereby growth must be facilitated and extra capital is needed to do so. In this instance, private shareholders may have the option to float a percentage of the organisation’s shares on the stock market. The shares are then bought up by the primary investors which give the company an influx of funds, with which they can use to carry out activities.
Any subsequent shareholders can choose to keep their shares or sell them on, as they appreciate. The aim of any investor or investment manager is to sell at the best possible price and thus, make a profit. This involves being aware of changes which could cause the share value to rocket in value or drop rapidly.
Snap entered the market high, as we mentioned above, with a $33 billion flotation. Would-be investors are now faced with the question of whether these prices will appreciate as the company grows, or whether to surge is due to the emotive nature of Snap’s main product. However, in this article, we won’t claim to offer advice but rather will hopefully provide an overview of the challenges at hand.
Snap: The Story so Far
Snap is the company behind the popular social media platform, Snapchat. Developed back in 2011 whilst its founders were at Stanford University, the project has grown rapidly since. In 2013, Facebook was rumoured to have bid over a billion dollars to get their hands on the company. However, Snap remained independent of the social media giants.
Snapchat has become hugely popular with millennials and Gen Z’ers. It is now seen as the go-to platform for the younger generation, thanks to its dedication to providing innovating ways to share content.
Like most social media platforms, Snapchat has also found ways to generate income and has recently become a darling of the advertising sector – especially in campaigns aiming to reach the 35 and under market. Many of the world’s leading news outlets have undertaken Sponsored Lenses which can cost in excess of £700,000. Many huge brands including Taco Bell, have seen spectacular results using Snapchat for campaigns. For this reason, the company has grown rapidly. From 2015-2016, Snap recorded a 589% growth in revenue. It is seen by many as ‘the next big thing’.
To Snap or not to Snap?
Snap as an investment prospect has been very divisive. It is still a loss-making business, which for investors is off-putting. Share prices were initially valued at $17. They then surged to $24 and levelled off at $20.58. These were far above expectations. So, for many, their initial price posed a shock. As the initial price is high, there is a chance that they could drop and constitute a loss.
However, given the path already paved by Google and Facebook, it could be said that investors are more receptive to a prospect like Snap. They too incorporated a great deal of hype along with huge valuations and developed to become a huge success. For this reason, there is an emotive aspect to Snap. Yet, they are still in the early stages of turning their product into a money-maker.
Overall, Snap’s IPO has certainly caused a buzz. Whether it will eventually be a successful venture for investors has yet to be seen. What we can say is that it is definitely an interesting case. Here at AGL Wealth, we have successful wealth managers with over 20 years of experience. If you wish to chat about your investment portfolio or any aspect of your financial planning, don’t hesitate to get in touch at aglwealth.com.