By Daisy Maxey
When clients ask financial adviser Michael Busch about buying
shares in Snap Inc.'s initial public offering this week, he warns
them to consider it a speculative play.
Mr. Busch, president of Vogel Financial Advisors in Dallas, says
he tells clients they would be buying a company that's currently
losing money and facing competition from several technology
behemoths with significant resources, including Facebook Inc.,
Google parent Alphabet Inc. and Apple Inc. As such, he is advising
clients to limit any investment in Snap to an amount they're
comfortable losing.
Still, he says he's going to try to get some shares of the
popular social-media company at the offering price to satisfy some
eager investors -- though he knows it will likely be difficult
because of investor demand. "Whatever we request, we probably won't
get the full allocation," says Mr. Busch, whose firm manages more
than $300 million.
Snap may be the next big thing, financial advisers say, but to
them its IPO raises familiar risks: Investors are clamoring to get
in on an unproven company whose founders and backers will likely be
the biggest winners. These financial advisers -- who unlike brokers
at the banks underwriting the offering don't have ready access to
or a vested interest in pitching shares -- are therefore generally
advising clients to wait and see before buying in.
The Venice, Calif.-based company is set to debut this week on
the New York Stock Exchange under the ticker symbol SNAP. The
shares are expected to price Wednesday after the close and begin
trading Thursday. The company recently said it aimed to sell shares
around $14 to $16 a share, which would make for a valuation of
$19.5 billion to $22.2 billion on the company.
The five-year-old company lost $514.6 million in 2016, nearly
38% more than it lost in 2015, as it spent heavily on marketing,
research and data storage. But Snap is growing quickly, posting
revenue last year of $404.5 million, more than six times its 2015
revenue, according to recent regulatory filings. The company
reported 158 million daily active users on average in the fourth
quarter, the majority of them in the youthful cohort coveted by
advertisers.
At Miracle Mile Advisors in Los Angeles, financial adviser Brian
Sterz says a lot of clients are expressing interest in the IPO but
he won't be buying shares, instead hoping to get in if the shares
sell off some.
He says he believes Snap is in better shape than its losses
would suggest. "They have a huge growth trajectory," says Mr.
Sterz, who says his firm manages $740 million. "Yes, they are
losing money, but many young companies, particularly tech
companies, are not profitable for a number of years."
"While the popular investor portrayals of Snap's stock are
deciding if it is the next Twitter or the next Facebook," Mr. Sterz
says, referring to the divergent performance of the two stocks in
the years since their market debuts, "many are overlooking the fact
that Snap is the dominant communication app among 13- to
28-year-olds, advertisers' most valuable target segment."
Another risk factor some advisers are warning about: Snap's
nonvoting-share structure. Co-founders Evan Spiegel and Bobby
Murphy together hold about 89% of the voting shares, Snap has
disclosed. Investors won't get any voting power with shares they
purchase in the IPO.
Laila Pence, president at Pence Wealth Management in Newport
Beach, Calif., says she considers this share structure a negative.
She generally doesn't like IPOs as an investment, but especially
dislikes hot IPOs like this one.
Ms. Pence says a few clients have asked about buying shares, but
she's advised them against it.
"We're a bit worried that it might act like Twitter," says Ms.
Pence whose firm manages $1 billion. Twitter's shares closed Friday
at $15.98, far below their IPO price of $26 a share. "We would
rather wait until after the IPO and see what it does before we
consider putting any clients into it."
But Mr. Sterz notes that both Facebook and Google have made
changes to their share structures, further entrenching their
founders. Facebook went public in 2012 with a dual-class share
structure, and last year said it would create a new class of
nonvoting stock to allow Chief Executive Mark Zuckerberg to
maintain control. In 2014, Google added a new class of nonvoting
shares.
"It's a concern whenever there's limited voting rights, and this
is to an extreme, but it's nothing new," says Mr. Sterz. "All of
these companies are dependent on the actions of management, and as
a shareholder, you are betting on management so the structure isn't
an indication of whether things will do well or won't do well.
Facebook and Google have both done exceptionally well."
Elyse Foster, owner of Harbor Financial Group in Boulder, Colo.,
is requesting allocations to Snap's offering for some clients
through her custodian, Schwab Institutional. But she's warning
investors that the shares will likely be difficult to get and
encouraging them to temper their expectations.
She warns that those who hope to turn the shares around quickly
for a profit may be disappointed as many shares slump after the
initial-offering euphoria wears off.
Ms. Foster, whose firm manages $152 million, says most of her
clients who want to buy Snap are interested in doing so after the
shares have traded for a bit and can be evaluated. "History will
tell you that it's not going to pop up in value," she says. "Often
one can buy the shares at a reasonable price [after the debut] and
avoid the IPO frenzy."
Write to Daisy Maxey at daisy.maxey@wsj.com
(END) Dow Jones Newswires
February 28, 2017 11:40 ET (16:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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