Will investors be eager to snap up shares of Snap?

Will the reality surrounding the initial public offering of Snapchat’s parent company match the hype?

Unlike other high-flying tech companies such as Facebook (FB) or Alphabet’s Google (GOOGL), Snap will start its life as a public company deep in the red. According to the company’s IPO filing with the Securities and Exchange Commission, Snap had an accumulated deficit of $1.2 billion as of the end of last year. Its net loss in 2016 was $514.6 million. Both Google and Facebook were profitable in the three years leading up to their 2004 and 2012 IPOs, respectively.  

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CBS MoneyWatch/Irina Ivanova

Los Angeles-based Snap, which plans to raise roughly $3 billion in the offering, is already trying to temper investors’ expectations. The company expects the IPO to be priced between $14 and $16 per share, below the $30.72 price it was valued at during its latest round of financing. At the upper end of that range, Snap will be valued at $22.3 billion. The management team will try to win over investors during their upcoming “roadshow.” 

“The recently lowered range tells you that they aren’t as confident that investors are going to like it as they were a couple of weeks ago,” said Michael Pachter, an analyst with Wedbush Securities who follows the social media sector. He added that finding a path to profitability will be a challenge: “I think there’s a healthy skepticism among the investor class since probably fewer than 2 percent of them use it, and if they know anybody who uses it, that person is probably is under 30.”

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CBS MoneyWatch/Irina Ivanova

SnapChat’s technology allows people to send photos and video messages that eventually disappear. Daily active users have surged 48 percent to 158 million at the end of 2016 compared with a year earlier, topping Twitter’s (TWTR) 140 million. Revenue hit $404.5 million last year, a sevenfold increase from 2015 fueled by growth in ad sales. Wall Street will be watching closely to see if Snap will continue to grow at this torrid pace.

Further complicating the picture for Snap is the specter of Twitter and the promise of Amazon (AMZN). Twitter shares surged 73 percent on their first day of trading in 2013, but the microblogging site has struggled to earn a profit since then as its user growth slowed. 

“Twitter screwed it up for [companies] like Snapchat,” Pachter said. “Before Twitter, everybody assumed that users would just keep growing and growing and growing. ... Investors believed that when Twitter went public, it was going to double in size in a few years.”

On the other hand is Amazon, which has consistently sacrificed short-term profits for long-term growth ever since it went public two decades ago. The Seattle-based company has done right for investors as its stock has surged nearly 2,000 percent since 2007, and its market value now tops $400 billion.

So a lack of profit won’t necessarily deter investors from Snap.

Indeed, only about 33 percent of tech companies that went public over the past 16 years have been profitable, according to University of Florida professor Jay Ritter, who tracks IPOs.  

“For a company like Twitter, Snap and Facebook, growth is much more important in the eyes of investors than current profitability,” said Ritter. “As long as a company has a convincing story for why it can be profitable in the future, investors are willing to finance it, even if it’s currently losing money.”

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CBS MoneyWatch/Irina Ivanova
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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.