Free Essay: Company Valuation

Snap Inc. is a California-based company that allows people to send and receive pictures on their mobile devices. In March 2017, the company held its Initial Public Offering of $200 million shares of Class A common stock on New York Stock Exchange market. The shares were offered to the public at a price of $17 for each share. The size of the total offering was $3.4 billion (Berger, Davidoff Solomon, & Benjamin, 2017). Snap issues and sells $145 million shares of Class A common stock. However, the additional $55 million shares are for stockholders of the same type of stock. The company and selling stockholders also granted underwriters an option of purchasing $30 million shares of the stock within one month.

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Valuation Methods Used For Establishing the Initial Public Offering (IPO) Value of Snap Stock

The valuation techniques used to determine the IPO value of the stock of Snap Inc. comprised of various factors for determining the value of the company's Class A common stock. One of the methods is Snap's revenue. The company encourages publishers to add content that can entertain its users and share its adverts with the users. The potential revenue can be predicted through the daily usage of the app. For instance, in the United States, 41% of the consumers are between the ages of eighteen and forty years of age (Wiehe, 2017). Another valuation method would involve the use of discounted cash flow. Through the technique, the company can estimate its cash flow in the future over a given period and discount it from the current value. The rate of discount will show the risks, as well as trends in the market. Income statement technique would help analyze the size of sales and earnings of the company. In this manner, Snap will compare easily with other companies like Twitter and Facebook.

Potential Challenges In the IPO Valuation and How Such Challenges Can Be Minimized

Usually, companies experience challenges in their valuation to go public. One of these that Snap would potentially face is the length of time required to accomplish the process. The decisions are made by many stakeholders hence may be complicated and time-consuming, which affects the readiness for an IPO. Planning and proper preparation are also required for the activity to be successful. Appointing of advisors is also difficult as they have to be listed on the public markets. Such listing brings forth challenges on the kinds of advisors chosen (Berger et al. 2017). Additionally, Snap Inc. had overwhelming expectations in its initial public offering. In essence, its price is sensitive and the expectations may overshoot whatever the company would be capable of achieving in the future. There is also the burden of dealing with the expectations of shareholders and increased requirements of disclosure.

One of the ways of minimizing the challenges is by evaluating the right pre-IPO transaction strategy, which will enhance the value of the offering. These may include acquisitions, venture capital, joint ventures, alliances, as well as private placements. Undertaking transactions before going public would enable Snap to achieve maximum value. The transactions may involve financing the company, reorganizing the business and strengthening competitiveness (Berger et al. 2017).

Another strategy would be to understand the main drivers of the stock price in the market such as the institutional investors. Such include intermediaries of corporate finance, funds that deal with the management of money and corporate issuers. The institutional investors will work together to come up with relevant portfolio allocations hence outperforming the index. Benchmarking would help Snap ensure competitiveness on the key measures. The executives of the company can be familiar with the peer group of competitive firms like Twitter, Facebook, and Instagram.

The Stock Performance within the First Year of the Public Offering, And the Primary Drivers of the Stock Performance

When Snap Inc. went public through its initial public offering, Wall Street expected the company to be very successful. The organization saw a gap in the market and leveraged on the gap. Within the first year of the Snap's IPO, the stock price of the firm was low with below $10 for each share. In the first day of trading, the stock price was at $24.48 per share, which quenched a long drought in the IPO market. Comparing these two prices between the first day and a year after the public trading, there was a 60 percent drop. Business analysts projected that Snap Inc. would generate an estimated revenue of $540 million in its first quarter after going public. However, due to the significant drop in the sales, the analysts are now predicting only $283 million hence depicting a dramatic decline (Sharfman, 2018).

One of the reasons that lead to a decrease in stock performance of Snap is its slow pace to bring many advertisers onto its platform. The issue arises since the company sells most of its advertisements through the process of auctioning in which the highest bidder purchases the ad impressions. When the number of advertisers is high, the number of bidders will also be high thereby increasing the prices and revenue for the company. Another reason for the decline in stock performance of Snap is the increasing competition. Since Instagram has copied most of the best features of Snap, it hurts the company's growth. Instagram attracts more users as compared to Snapchat. Due to the big redesign of the app, it loses active users and causes displeasure (Sharfman, 2018).

Compare the Snap IPO to the Twitter IPO from 2013. Explain the similarities and differences in the initial issuance as well as subsequent stock performance

Snap Inc. entered the public market after the main stock indexes of the United States had posted the best sessions of their operation. An estimated amount of $5 billion was realized in the stock of Snap. The amount was similar to what Twitter realized on the first day of going public. Snap Inc. closed its trading at 44% representing $24.48 per share (Wiehe, 2017). A day before the stock opened, the company priced the public offering at $17 for each share. The prices rose to $26.05 and fell to $23.50. Due to the $24 price, the market capitalization of Snap was at $33 billion. This is higher than the market cap of Twitter, which was at $11 billion. When Twitter went public in 2013, the price per share was $26. In the debut, the company gained 72.69% as it closed at $44.90. The deal size for Twitter was $1.82 billion, which shows that the stock performance of Twitter increased subsequently. However, as opposed to Twitter, the Snap stock declined by 60 percent after one year of valuation of the initial public offering (Wiehe, 2017).

Assess the role of the Chief Executive Officer (CEO) in relation to the stock performance, suggesting how the person in that role may influence the performance of the stock and value to investors

As the CEO of Snap Inc., Evan Spiegel has a role to play in influencing the stock performance of the company. The CEO is expected to work on the outcomes of the valuation process in the long-run. In essence, he ought not to think about being fired by the investors if the company does not perform well after some period of going public. The decisions that Spiegel makes would also influence how the company performs since he is the founder and the CEO hence would aim at coming up with decisions that promote the success of Snap Inc. He is passionate about the company making progress and exploring any gaps that may exist in the market. He works to create a product with unique features, which meets the demands of consumers notwithstanding competition from other companies like Instagram, Twitter, and Facebook (Govindarajan, & Srivastava, 2019).

Risks/rewards position to the investor when purchasing stock during an IPO, indicating the circumstances you would advise an investor to do so

Initial public offerings have both risks and rewards. One of the risks is insufficient information or history. Since some of the securities are new to the market, they may lack historical performance, data, as well as vital details that the publicly-traded securities are expected to offer. As such, some companies may fail to disclose information about their assets, earnings, or even future projections. Even in situations where a company agrees to disclose the information, it may still be difficult for investors to predict the performance of the company after the IPO since the enterprise may change the strategy of operation.

Concisely, IPOs have benefits like the provision of opportunity for most of the savvy investors to realize substantial gains in the short-term. Additionally, it can cause an increase in the value of the stock of companies. When a firm buys into a public corporation, the company will understand the relevant strategies and market trends efficiently hence promoting long-term success (Govindarajan, & Srivastava, 2018).

However, before investing in an IPO, there is a need to establish the management team of the company and the business model used. Through these, investors will be able to know the growth, revenue, and earnings of the organization. In some cases, media hype may lead to overvaluation of the IPO. This may make a company underperform after going public. Therefore, investors should understand the reasons that lead to such underperformance of companies (Berger et al. 2017).

Predicting the stock price of Snapchat in the next five years, indicating the key drivers of the performance and the resulting impact on the stock price. Provide support for your prediction

The stock price of Snap Inc. is expected to soar back to the IPO price of $17 for every share. The company has upgraded the services it provides to the consumers to outperform its competitors. The company does not only serve as a site for social networking for a specific group of people but rather creates a wide base of customers across the global markets. The impact of Snap Inc. will improve over the next five years due to the increasing number of online users. The major factor of consideration would be innovation in which the company includes additional unique features to the products and services. The CEO can also ensure that the content provided in its adverts are entertaining to the users so help expand the market base further (Berger et al. 2017). In November 2018, the price of shares rose up to 5% with a trading price of $12.40 per share. Due to the stabilization of the Apple app of Snap, it is expected that the daily average in the number of users will increase substantially. The company has also stabilized traction for users of Android devices. Continued progress on the development of the Android and Apple platforms will enable the company to record a steady trajectory in its growth (Habib et al. 2019).

Conclusion

For long periods, the average revenue of Snap Inc. has trailed the revenue of Twitter as it generates only a third of what Twitter generates for each use. However, Snap has a range of levers at its disposal to help close the revenue gap. These may include improved measurements of the traction of advertisements that cannot be easily skipped. Product differentiation can also enable the company to realize increased revenue, as well as expand the market base. Ideally, companies need to consider some of the vital factors before it enters an initial public offering. The conditions that may lead to underperformance of the company after going public would also serve great consideration in the market.

References

Berger, D. J., Davidoff Solomon, S., & Benjamin, A. (2017). Tenure Voting and the US Public Company. Business Lawyer, 72(2). Retrieved from https://poseidon01.ssrn.com/delivery.php?ID=953069091068006120077120094108076085042081072032...