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Snapchat IPO: Can It Live Up to Its Potential $22 Billion Valuation?

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Snap Inc., the parent company of the disappearing photo-sharing application Snapchat, is asking the investors for a lot of money and faith for its widely anticipated initial public offering (IPO).

The company will offer 200 million shares between $14 and $16 per share and is expecting to raise $3.2 billion. Snap’s market value could be up as much as $22 billion through the offering, though an earlier estimate valued Snap at between $20 billion to $25 billion.

Bloomberg reportedwith data from Bloomberg Intelligencethat Snap is asking a heftier price than its competitors when they go public. Snap’s proposed price is valued at 19.7 times the forward 12-month advertising sales, just over the 19.4 times that of Facebook (FB - Free Report) had and 13 times that Twitter (TWTR - Free Report) had during their IPOs.

However, investors will have to trust the company’s founders and management to maintain growth and revenue despite the substantial price that Snap is asking for.  The company listed their shares as non-voting share, which means the control will largely rest in the hands of co-founders Evan Spiegel and Bobby Murphy and the majority holders. Stockholders will have to put complete trust in the company when it comes to director nomination and executive compensation. The co-founders will each have 10 votes per share while existing investors will have one vote per share.

Snap, who declared as a camera company instead of a social media company as many others had predicted, reported total revenue of $404 million for 2016, which is about six times more than the 2015’s total revenue at of $58 million. However, the company also experienced a larger total net loss from $372 million in 2015 to $514 million in 2016.

Another concern that investors are having is Snap’s ability to grow new users. As mentioned in their SEC filling that the Daily Active Users growth for the quarter ended September 30, 2016 remained flat after a 7% growth in the previous quarter ended June 30, 2016 from 143 million to 153 million.

The company’s main user population is between 18-34 years old, where brand loyalty is less of a concern and more likely to follow trends than other demographics. As competition like Facebook’s Instagram Stories, another disappearing-photo function, Snap will have to have a solid plan to attract investors.

This will be one of the largest and most anticipated IPOs in the tech industry in recent years since China’s Alibaba Group (BABA - Free Report) ’s $25 billion market debut back in 2014 and Facebook’s $16 billion offering in 2012.

Both Alibaba and Facebook have continued to excel after their IPOs. Alibaba started their offering at $92.70 and is currently trading at $100.74. Facebook’s stock has grown 250% from $38.23 in 2012 to currently at $133.72. Though both companies encountered some obstacles and slumps right after their IPO, Facebook’s success is no doubt the path that Snap is looking to follow.

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