Snap, the first big tech listing since Alibaba in 2014, has already experienced the highs and lows of the stock market in the week since its NYSE listing.
Shares on Wednesday closed at $22.81, down from a high of $29.44 last week, but still above the $17 IPO price.
That performance, along with doubts over corporate governance, has raised questions over if, rather than when, Snap will join the S&P 500.
Who gets to join the S&P 500?
David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said a decision on Snap was not imminent.
S&P Dow Jones Indices prefers initial public offerings to be “seasoned” for six to 12 months before being considered for an index.
At that point, other eligibility requirements would be assessed. Snap would easily pass some of these, such as having a primary listing on one of the US exchanges and having the US portion of fixed assets and revenues making up the “plurality” of the total.
Alibaba, the Chinese ecommerce group, for example, is not in the index because it has not passed enough of the measures to indicate that it is domiciled in the US.
What about the issue of no voting rights?
Much has been made of Snap’s decision to sell shares in the IPO with no voting rights, but a more straightforward question would trouble the index manager in the first place. Snap would have to be profitable, in total, across the past four quarters, including the most recent three months.
Last year, Snap lost more money than it made in revenues — a net loss of $515m versus sales of $405m — which could delay index membership, unless Evan Spiegel, the wunderkind co-founder and chief executive, can manage a dramatic improvement.
Beyond profitability, one of the criteria for entry into the S&P 500 is a corporate governance structure consistent with standard US practice. It is unclear how this may, or may not, pertain to Snap’s decision to sell non-voting shares at the IPO, a first in the US.
Mr Blitzer said other companies in the index, including News Corp and Facebook, had share classes with “super voting rights”. Google, meanwhile, added a share class with no voting rights once it was already an S&P 500 member.
If a company meets all requirements and is selected, the moment of entry into the index may hinge on practical matters. “The biggest factor usually is figuring out how to add a company with the least amount of disruption,” Mr Blitzer said.
Facebook v Snap
Facebook | Snap
Market capitalisation at IPO: $104bn | $19.7bn
Funds raised at IPO: $16bn | $3.4bn
Daily active users, 2016: 1.23bn | 158m
Revenue, 2016: $27.6bn | $404m
Profit, 2016: $10.2bn | $515m loss
What do the other benchmark providers say?
The issue of non-voting rights is not a criterion for exclusion from FTSE or Russell indices, said Mark Benhard, of the London Stock Exchange Group. But the investor feedback means the group will weigh the issue at meetings already scheduled for March.
MSCI said Snap’s inclusion into the MSCI USA index would be assessed as part of the next semi-annual index review in May, but the group is also surveying market participants on whether governance considerations, such as voting rights, should be a requirement for eligibility. Depending on the feedback, MSCI could start a formal consultation process on a proposal for change.
How do investors feel about Snap being included in indices?
The Council of Institutional Investors said on Monday it believed indices should reject companies with non-voting shares because they “deny shareholders any voice in the company”.
In a letter to the council, Michael Lynton, Snap’s chairman, said the board had “carefully considered” its structure.
He said it was important to note that it had not opted to be a “controlled company”, so its board must have a majority of independent directors, and its remuneration, nominating and corporate governance committees must be independent.
In regulatory filings, Snap said it believed the proposed share structure would help create value for shareholders. “We believe that a significant portion of our success thus far has been attributable to our founders’ leadership, creative vision and management abilities,” it said.
Snap declined to comment on its potential inclusion in indices.
Mr Blitzer said: “We get lobbied all the time. Usually people want something in, not out, but we will listen to the comments, thoughts, ideas, reasons and so on and [then] make up our mind.”
How important is it for benchmarks to include Snap?
Being part of an index guarantees a certain level of ownership, regardless of how a stock performs.
S&P Dow Jones Indices, for example, estimates that for every stock in the S&P 500, about 10 per cent of the available shares are owned by index funds or exchange traded funds. About $2tn in assets track the index and $7.5tn to $8tn are benchmarked to it. Many actively-managed funds are benchmarked against the S&P 500 and are, therefore, nervous not to hold companies that feature prominently in the index.
Still, being part of a benchmark index is not the lifeblood of a big tech IPO. In fact, investors buy stocks with big growth prospects, such as Snap, on the hope of outperforming the benchmark.
Vince Rivers, a senior portfolio manager at JO Hambro, said: “You can beat the index by buying a couple of IPOs that aren’t in the index” if the listings outperform the broader market.
As institutions increasingly ask their managers to have a high “active share” (or proportion in their portfolio that differs from the benchmark index), it is helpful for them if large companies such as Snap remain outside the index.
Snap bulls may have their fingers crossed that the company is not selected for the big bellwether just yet.
Additional reporting by John Authers
A panel in this story — Facebook v Snap — originally stated that Facebook’s market capitalisation at its IPO was $31bn. It has since been amended to $104bn.