Snapchat set for IPO surge

"We began commercial operations in 2011 and for all of our history we have experienced net losses and negative cash flows from operations." That line from IPO documents filed with the US Securities and Exchange Commission (SEC) last month might normally send investors running for the hills. But such is the market's thirst for big-name tech businesses that image messaging app Snapchat will somehow be worth $24 billion (£19 billion) when it floats in New York Thursday.

Snap Inc, created by Stanford University pals Evan Spiegel, Bobby Murphy, and Reggie Brown, has raised $3.4 billion after selling 200 million shares at $17 each. Reportedly more than ten times oversubscribed, it exceeded initial expectations of $14-$16.

"We believe that investors' future perceptions and expectations, which can be idiosyncratic and vary widely, and which we do not control, will affect our stock price," writes Snap.

Well, those investors appear prepared to overlook some serious hurdles and pile into the shares. Trading begins at around 2.30pm, and spreadbetter IG Group currently points to a 16% gain at the opening bell. In truth, it could be more.

But will the love affair with this loss-maker last, or will it "do a Twitter"?

Since we last covered Snap back in November, we've learned that the company lost $514.6 million in 2016, up from $372.9 million the year before. In fact, it's never made a profit.

And, over the past 12 months, it's accumulated deficit swelled by $500 million to $1.2 billion.

Revenue right direction

At least revenue is moving in the right direction, up almost sevenfold last year to $404.5 million. And average revenue per user (ARPU) more than trebled to $1.05 in the final three months of 2016. It was more than twice that in North America at $2.15.

Trying to get a steer on Snap, the favourite comparison is with Twitter and Facebook. But their fortunes could hardly have been more different.

Since Twitter floated in 2013, its share price is down 62%; and it actually makes money. In the fourth quarter, weaker ad revenue - down 1% at $638 million - meant group sales of $717 million missed estimates, although earnings of 16 US cents were slightly better.

Facebook, meanwhile, is up 259% from the first day closing price nearly five years ago. It just smashed forecasts for fourth-quarter profit and revenue. Ad revenue jumped 53%.

Apart from the obvious financial issues – how profitable can core customer, the hard-up teen, ever be - new shareholders will have no voting rights, either, leaving control of the business in the hands of Spiegel and Murphy.

So, expect plenty of excitement when Snap launches, but even Twitter rallied hard in the weeks after its IPO. Now very much in the eye both of the public and Wall Street's money men, Snap must keep growing the top line and convince the market that it will be profitable.

Failure to do both will only confirm the case for giving Snap a wide berth.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.