Valuing Snap Stock for Initial Public Offering (IPO): Challenges & Solutions - Essay Sample

Introduction

The Possible Valuation Methods in Establishing the Initial Public Offering (IPO) Value of Snap Stock, Based On the Valuation Techniques. The Potential Challenges in The Valuation and How Such Challenges Can Be Minimized

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An initial public offering (IPO) occurs at the moment when a company starts trading on the stock market, where everyone can buy and sell their shares. This type of operation is also known as a Public Offer of Sale. Going public is a growth strategy that many companies consider at a given moment. It is a transcendental decision for a company given that the implications of quoting in a market affect all aspects of it, from its organization to its way of operating, assuming a transformational effort that requires maturation and much preparation. Every time the company puts its shares on the stock market through an initial public offering (IPO), the shares are freely traded at market value (Bonaventura & Giudici, 2017). Among the methods that were used in establishing the IPO of Snap stock, the main ones were through market value and book value.

The market value of a company is the antithesis of the book value. The market value of an open capital corporation is determined by the market value of its shares multiplied by the number of shares that are circulating in the market. The companies have a book value, an accounting measure, therefore called book value from the financial statements. The book value has different ways of estimating, according to geography. The most orthodox view recognizes the book value as the amount of subscribed and paid the social capital of the company, which is just the value of its "legal responsibility" before third parties. The book value of a stock is calculated by dividing the net worth by the total number of shares outstanding. The market value is the valuation of the company under the joint view of investors. The market value per share is an easy measure to derive and is imposed by the stock price on the stock exchange, taking into account, among other factors, market forces, supply, and demand.

Other factors that were considered in determining the IPO of Snap Inc. included the historical financial results of the company, the estimated future performance and trends, the expected future financial performance, and the performance of their competitors such as Twitter and Facebook that had also gone public. Market-based methodologies and financial techniques were also used in determining the IPO's value. Other methods that were also used include the discounted cash flow method (DCFM) that estimates future cash flows for a certain time then discounts it to the present time. The guideline public company (GPCM) technique was also used as well. This method provides an estimation of the value retrieved from several stock prices.

The Performance of the Stock Within the First Year of the Public Offering and The Primary Drivers of the Stock Performance

Snap Inc. became the first technology company to open its capital in the United States in 2017. The company, which had set the share price at USD 17 per share, began trading on the market above USD 24, that is, with an increase of 40%, reaching a valuation of USD 33,000 million. The initial public offering (IPO) raised the company's market value to a staggering $ 33 billion. Each share was being sold for $ 24, a 41% increase over the $ 17 of its guide price, reflecting strong investor demand (The Dev, 2017). The firm had set an exit price for its share at USD 17, one dollar above the expected range, which previously oscillated between USD 14 and USD 16, due to the strong demand that placement banks were receiving. A few days after the trading session, shares rose to $ 25 and seemed ready to go even higher. Snap raised $ 3.4 billion in its IPO, discharging 200 million shares of class A. The impressive boom in Snap's stock was boosted by strong investor demand for the social media service, which had grown to be one of the few billion-dollar technology companies to become public.

After an intense struggle by investors for the shares of Snap in its initial public offering (JPO), the appreciation of the shares of the company left something to be desired, rising the only US $ 1.00 in a year to the US $ 18, 00 per share. The price is quite different from that seen in early March when Snap's stock peaked at a high of $ 27.09 in 2017. Since then, stocks have plummeted amid some moments of recovery. In August last year, the shares of the owner of Snapchat were traded on the US stock exchange at $ 16.83. According to Investing.com, the annual variation of Snap stock remains negative at 33.52% (Business Insider, 2019). The expansion of the user base throughout 2017, however, did not meet market expectations, making it difficult to maintain the company's shares at high levels. Recently, Snap's shares tumbled from $ 20.75 down to $ 16.32 shortly after Kim Kardashian's half-sister, Kylie Jenner, claims to have stopped using Snapchat. The comment cost Snap a loss of $ 1.3 billion. For the time being, the appreciation of Snap shares remains at the 5% level in relation to the IPO price; in the period, the S & P 500 accumulated appreciation of 12%.

Comparison Between The IPO of Twitter and Snap from 2013. Similarities and Differences in The Initial Issuance and The Subsequent Stock Performance

The IPO of Snapchat's parent company is reminiscent of those carried out by other social networks such as Twitter, whose shares rose by 73.46% at the close of July 11, 2013, the date of its debut on Wall Street, compared to USD 26 of the price of Snap's IPO, while at the moment, the quotation accumulated a fall of 40% with respect to this price. The case of Twitter, its shares were listed for $ 26.00, adding almost 93% in the session and finally closing at $ 44.90, with a gain of 73% in one day. Appetite for the company remained, reaching a record high of 73.31 dollars at the end of December 2013, adding a gain of 182% in 50 days. On August 20, 2015, Twitter titles bore their placement price, and after a rebound during the following months, the stock has not recovered those levels since November 2015 (Fiegerman, 2017). As for Snap, during its debut in the New York Stock Exchange, its titles skyrocketed from 17.00 to 24.48 dollars (+ 44%) just in the first day, touching a maximum of 26.05 dollars. After episodes of volatility, the stock has broken $ 17.00 per share after 91 days of operation. On 10th May 2017, Snap published its quarterly results, where the market reacted negatively, bringing the securities to show a 21.5% adjustment to the next session.

Snap had done everything possible to distance itself from the comparisons with Twitter, the last big IPO of social media. In its presentation for an initial sale of shares, the maker of the Snapchat mobile app emphasized that it measures itself through daily active users - an indicator that Twitter did not disclose. Snapchat also said it planned to focus on developed markets instead of striving to find customers around the world. However, user growth slowed down, and losses grew, and the concern of investors never abated. Twitter revenues began to slow down when advertisers became aware that, with user growth stagnating, there was no reason to spend more. Snap also tried to avoid one of the mistakes of the IPO of Twitter (The Dev, 2017). The latter was compared in terms of strategy with Facebook, the media giant, but ultimately paled in the face of its fast-growing rival, and since then it has been punished by investors. Snap, on the other hand, is defined as a holding company, owner of the Snapchat application, the video camera to wear Spectacles and many more things to come.

One of the variables used to quantify the success of a social network like Snapchat is the number of active users and the growth of that number over time. The service had a remarkable growth since 2014, but that trend has relaxed in recent quarters. According to the data of the S-1 document necessary for this IPO, the active users of Snapchat grew 48% between 20115 and 2016. This figure was very striking, but there was a worrying fact: in the fourth quarter of 2016, the growth was of only 5 million users when in previous quarters the jump had been much greater. Snap made 404 million dollars in 2016 (the growth here was spectacular because in 2015 it made 58 million dollars) and lost 514 million dollars in that same period. The year before that Twitter went public had an income of 317 million and losses of 79 million dollars.

The audience sizes were also slightly different in the two cases. Snapchat had managed to attract 158 million active users at the end of December 2016. It represented an increase of 48% year-on-year. Twitter counted when it presented its credentials 215 million monthly active users and 100 million daily (around 50 million less than Snapchat). The 3rd quarterly user growth after the IPO was almost similar. In the case of Snapchat, the fourth quarter of 2016, the company barely grew by 3% when the pace was much higher, especially between 2014 and 2015. In the case of Twitter, the growth rate just before going public on the stock market of its monthly users was 6.4%, reaching 218 million. As can be noted in the graph below, the IPO of Snap has been reducing although it rose slightly in Jan 2019 to just $10 only then to $12 in April.

The Role of the Chief Executive Officer (CEO) Regarding Stock Performance

One of the biggest blows for Snap, the owner of the multimedia messaging application when the finance director, Tim Stone, resigned after less than a year in office and a few weeks before the presentation of the financial report of 2018. Evan Spiegel, the current CEO, had hired Stone in May of 2017, after 20 years when the former CFO served as Amazon's vice president of finance (Mugucia, 2013). The exit of Tim Stone was the one that caused the biggest impact for Snap, because after the announcement a massive sale of the stock titles originated, also driven by the internal struggle that the firm already had to retain its users. "The fact that a talented CFO left after only eight months suggested that he was surprised by what he found," said the president of the executive search firm Crist/Kolder Associates, Peter Crist.

CEO's play a major role in determining the stock performance. A CEO is responsible for understanding the business (financial astuteness) of the company. This helps ensure the overall financial health of the company by maintaining a focus on financial metrics to improve the performance and position of the company in the capital markets. A CEO uses financial information to design strategies, ensure sound investments, and create appropriate business models. To find the real impact of a CEO, one should observe what happens to a company's stock price when it recruits or dismisses a top executive (Investopedia, 2018). The rise and fall of a financial director at Eastman Kodak is an excellent illustration. Christopher J. Stephen was hired by Kodak in January 1993 to revitalize the company whose earnings and stock prices languished. He was called "financial director who, a white knight, should release Eastman Kodak from his embarrassment" and investors warmly applauded his commitment. The price of the stock rose in the days that followed, with an increase in the value of the company exceeding $ 3 billion...