Recently, rumors that Snapchat will be going public in 2017 have surfaced. The Wall Street Journal has reported that the initial public offering will value Snapchat’s parent company, Snap Inc., at $25 billion, making it the biggest IPO since 2014.

The Daily Orange spoke with Thomas Barkley, professor of finance practice in the Martin J. Whitman School of Management at Syracuse University, to understand what an IPO is and what it means for the popular social media app.

The Daily Orange: What is an initial public offering?
Thomas Barkley: (An Initial Public Offering is) when a private company gets listed on a stock exchange so people can buy and sell shares in that company. In other words, the ownership is now spread out over many people.

The D.O.: Can anyone decide to go public?
T.B.: There are certain size restrictions. Only big companies typically are going to be able to list on the New York Stock Exchange. The Nasdaq, which is also an exchange, will allow for smaller companies but they’re still going to be big companies.

The D.O.: Is one share the same percentage of ownership at each company that goes public?
T.B.: A company decides how many shares they’re going to list. Usually it’s a multi-step process. They’re going to authorize a number of shares, then issue shares outstanding.

The D.O.: What is the advantage of staying private?
T.B.: If you are a publicly traded company, the Securities and Exchange Commission, the SEC, regulates your business. That means that they require you to submit quarterly financial statements to show how you’re doing. When you are filing with the SEC you are making publicly available not just your financial statements but what your business is. So other people can all of a sudden freely access that. Your competitors, who are still private, may have access to information that you are providing that they’re not disclosing to anybody. So there are advantages in terms of regulation for remaining private and in terms of competitive advantage.

What’s happened with a lot of companies recently is they’re finding they can get capital from other sources, meaning they don’t have to get money from the public anymore. They have banks that will lend them money or they have these venture capitalists. These big, big companies have stayed private for so long because they found other cheap ways of renting money.

The D.O.: How has the app market changed IPOs?
T.B.: I think that that varies by industry. I think apps have affected businesses more that are consumer oriented. Because the goal is to have as many consumers on board as possible before you go public. And I think that’s why Twitter and Snapchat went public later.

The D.O.: Is that why it’s newsworthy when apps go public?
T.B.: One reason is that many times these companies are not even profitable yet. They’re at a point where they want to expand into different areas and they want to be profitable, but they need extra capital. And it’s such a large amount of capital that the venture capitalists don’t have that kind of money to put in.

It could also be like their growth was going up and it’s now starting to settle off. So maybe if we have a big infusion of cash, we can make it start growing again.

The D.O.: What goes into a valuation?
T.B.: Part of it is what the management of the company are able to spin as a story to potential investors. If I spin it and say in addition to advertising, we’re going to have other services and those other services will be premium, now we’re going to start charging our existing customer base for new things they can do. So I can convince investors that everybody’s going to do it or there’s going to be 85 percent conversion from free to premium, and we’re going to make all this money, then the valuation in part comes from that.

That’s where investments in new technology firms, in many instances, their valuations are over-inflated because people believe in how great these companies are going to be. Whereas IPOs with brick-and-mortar firms have valuations that tend to be more realistic.

The D.O.: Do you think their rumored valuation of $25 billion is correct?
T.B.: Is Snapchat worth $25 billion? I would say no.

The D.O.: What happens once Snapchat goes public?
T.B.: There are different responses to social media companies. If I look up Facebook, for instance, their stock price went from $38.23 to today they’re trading at $127 in four years. That’s very good. Investors love Facebook.

If I look up Twitter, it’s red. It went public at $43.98, peaked at $69, and today Twitter sells for $16.75. So about a third of the value that they went public at. Both social media companies, lots of users for both of them. One company a tremendous success, one company, by investor perspective, a failure. If Snapchat has a strategy for converting users into profitable cash flows as result of growing their business and offering new and innovative services to their users, then they could have a Facebook-like trajectory. It’s not a guarantee that you go public and everything is rosy.

Published on October 17, 2016 at 10:45 pm

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