Snap Inc. investors need to do a reality check instead of getting carried away by the euphoria generated after the shares of the company listed at a huge premium to the IPO price. Snap shares gained 44 percent on listing and closed at $24.5 on Thursday on the NYSE as against the issue price of $17.
Snap, which owns photo-sharing mobile app Snapchat, had a bull run on Friday, gaining 10.66 percent to end at $27.09, translating into a cumulative gain of 59.35 percent and valuing Snap Inc. at almost $32 billion.
On its first day itself, the company's valuation soared to $28.4 billion at $24.5 per share. The company sold 200 million shares to investors to raise $3.4 billion in its successful initial public offering (IPO).
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But is the valuation justified and should investors be cautious? The answer seems yes.
A Bloombergquint columnist warned that long-term investors are in for "disappointment," citing profitability factor at the time of going public.
Leonid Bershidsky said that out of 20 tech companies that went public in the US in the last decade, nine are trading below the issue (IPO) price. Out of these, six firms, such as Renren, Groupon and Lending Club, incurred losses in the year before they went public.
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"The first trading day is soon forgotten and investors start looking at financial reports, one at a time," he wrote.
It is pertinent here that Snap Inc. incurred a loss of $500 million on total revenues of $400 million in the calendar year 2016. It had about 100 million users. The losses widened from $382 million 2015, though revenues spiked from $59 million.
Twitter, which went public in 2013 by selling 70 million shares at $26 per share, listed at $45 on November 7, 2013, a gain of 73 percent. However, the share has been on a freefall since then and closed at $15.75 on Friday.