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HomeMarketsWhy Wall St embraced the Snap IPO

Why Wall St embraced the Snap IPO

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A tell-tale sign of a booming equity market is a hot technology listing and the blockbuster debut by Snap, duly summoned memories of the dotcom era.

Shares in the parent of the popular messaging app surged more than 40 per cent in their New York Stock Exchange debut on Thursday where the fresh-faced co-founders rang the opening bell to cheers from the trading floor. On Friday, they had added another 14 per cent to $27.90 by midday in New York.

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While the company lost more than $500m last year and faces questions over its corporate governance as well as heightened competition from rival Facebook, it has effortlessly achieved a market valuation of more than $30bn. That puts Snap ahead of the likes of the century-old Kellogg’s, but at a fraction of Facebook and Google at nearly $400bn and $just under 600bn, respectively.

Three factors help explain why Snap has a hit on Wall Street and raised $3.4bn in capital from investors — starting with a compelling sense of timing.

Investors have consistently pushed US equity benchmarks into record territory in recent months, prompting talk of a return of “animal spirits,” a reference to the buying enthusiasm associated with increased risk-taking on Wall Street.

As traders awaited the opening price for Snap on Thursday, for example, some wore hats that read “Dow 21,000” after the blue-chip average index broke through that threshold on Wednesday, just over a month after piercing the 20,000 level.

Mounting confidence in the US economy and a sustained recovery in earnings growth in the backdraught of a pro-business agenda from the Trump administration remains the main driver of bullish equity market sentiment, providing fertile ground for an IPO.

“It is easier to IPO when markets are at all-time highs,” said Matthew Kennedy, an analyst at Renaissance Capital, which runs IPO-focused exchange traded funds. “Whether it’s venture capital, private equity, management, etc, all recognise that strong markets help maximise valuations and deal interest.”

Snap’s successful debut also reflects the absence of a big tech IPO since Alibaba, when the Chinese ecommerce giant went public with a record $25bn deal in September of 2014.

Against that backdrop, investors were hungry for a growth company such as Snap which saw a near sevenfold increase in revenue last year to $405m — albeit yet to turn a profit.

“There is a scarcity value,” said Vince Rivers, senior fund manager at JO Hambro. “There is pent-up demand in the portfolios with people looking for new ideas.”

Many of the fast-growing tech companies, including Uber and Airbnb, have opted to stay private, raising billions of dollars through private fundraising at high valuations and creating a herd of so-called unicorns, or tech companies that have achieved valuations of $1bn or more without going public.

Snap’s performance bodes well for other unicorns planning to make their way to Wall Street, but so far investors expect this year’s deals will be primarily smaller unicorns and not necessarily the “deca-corns” like Snap.

The other key element at play was a fear among investors of missing out on a hot investment opportunity that — despite all the doubts about Snap’s long-term prospects — may ultimately emulate the performance of Facebook, Netflix and Amazon.

Multiple investors who took part in Snap’s roadshow, or marketing campaign, said they were struck by how many people had attended the events, with a lunch at the swanky Mandarin Oriental hotel attracting some 500 prospective buyers.

“People were sitting in that room [the roadshow lunch] saying I think it is too expensive, but I am looking around this room and [thinking] it [the IPO] is going to work,” Mr Rivers said.

Now, as Snap joins the ranks of publicly listed companies, a big test looms with the release of its first quarterly earnings report expected in the spring.

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