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Snapchat owner opens up 41% for $27.8bn valuation

The US broke its long drought of hot technology initial public offerings on Thursday as shares in Snap soared more than 40 per cent in their market debut despite questions about corporate governance and profitability at the owner of vanishing messaging service Snapchat.

A pack of traders huddled around the desk of Snap’s designated market maker for more than an hour after the opening bell at the New York Stock Exchange to strike the opening price, when cheers rang out across the floor. The IPO was priced at $17, above the indicated range of $14 to $16, with the shares opening at $24.

Shares rose above $25 in afternoon trading, valuing the group at close to $30bn.

At that valuation Snap is worth two and a half times social media rival Twitter, and about the same as food manufacturer Kellogg, video games maker Electronic Arts and electronics company Panasonic. But it is dwarfed by its two main rivals for advertising dollars: Google, at $590bn, and Facebook, at $400bn.

Some 75m Snap shares traded hands at 11.35am New York time, when it began trading, the highest volume of any stock worth more than $50m on US exchanges, according to data from Bloomberg.

The enthusiasm came despite the decision by some portfolio managers to shun the stock over concerns about the company’s decision to issue shares with no voting rights, a first in the US, and to ensure control for the co-founders even if they leave the company.

In addition, some analysts questioned whether an app with no profits and fierce competition from other social media groups warranted such a lofty valuation. Last year the company recorded a net loss of $515m, up from $373m in 2015, on revenue of $405m.

Brian Wieser, an analyst at Pivotal Research, said Snap was “significantly overvalued” because of the completive environment it faces, a mostly unproven business model and the risks to shareholders that they will be diluted because of “aggressive” share issuance to employees.

Mr Wieser issued a “sell” rating on the stock and a price target of just $10.

Snap’s co-founders rang the bell at the NYSE as they awaited the first trades of the IPO that has made them billionaires. Evan Spiegel, the 26-year old chief executive, and Bobby Murphy, the chief technology officer, dressed in smart suits and ties, unlike previous tech entrepreneurs who have preferred casual wear such as hoodies and T-shirts. NYSE president Tom Farley was also on hand, standing on the podium beside them.

Mr Spiegel’s fiancé, model Miranda Kerr, joined him at the NYSE, among a Snap entourage of about 100 people including employees, board members and family.

Outside the stock exchange, a large yellow sign reading ‘Snap Inc’ hung above the entrance. Inside, screens featuring Snap’s signature ghost icon hung above the NYSE floor, while Snap and NYSE staff sported Spectacles, Snap’s video sunglasses.

A Snapbot, a yellow vending machine that dispenses Spectacles, also appeared at the NYSE as a gift from the company, with a bunch of yellow balloons flying on top.

Snap also gave out spectacles to traders at their designated market maker, GTS, but they chose not to wear them so that the glasses would not reveal the order books in the reflection.

Founded as an alternative to existing social media platforms, Snap allows for quick-fire exchange of “snaps” that disappear after 10 seconds.

Snap has added features including 24-hour collections of photos called “stories” and a platform for publishers where users watch news and entertainment called “discover”. Snapchat is selling itself as a place mostly for close friends, rather than acquaintances that fill Facebook and strangers that dominate Twitter.

Some 158m people open the app an average of 18 times a day, with 60 per cent of them sending a snap to a friend every day and 25 per cent creating a story. The largest age group is 18 to 24, a generation that advertisers are hoping to reach on mobile now that they do not spend much time watching TV.

Snap’s IPO filing with the SEC forged new ground, referencing sexting, or the sending of intimate images, toilet photos, and a cartoon ghost spewing a rainbow.

Pre-IPO investors who will benefit from the offering stretch from venture capitalists Benchmark and Lightspeed Venture Partners to large tech companies Alibaba and Yahoo, and include a Silicon Valley high school. Saint Francis High School in Mountain View invested $15,000 in Snap’s seed round, after kids at the school were the first to tell a venture capitalist about the app.

The deal is being touted as a barometer for investor demand for tech listings, coming in a particularly slow period. The latest hot tech companies, which also include Uber and Airbnb, have been able to raise billions of dollars at high valuations.

John Colley, a professor at Warwick Business School, noted that the company faces significant challenges in competing with Facebook and Google, generates substantial losses and is suffering from slowing growth.

© Nicole Bullock/FT

“Snap Inc is benefiting from institutions and individuals being awash with cash,” he said. “The top end valuation reflects high liquidity rather than a great prospect. There is far more cash than opportunities, which means pursuit of long odds risky options such as Snapchat.”

Additional reporting by Adam Samson in New York

Via FT