Why Snap Will Be The Most Controversial Internet IPO This Year

In a note released Monday, MKM Partners explained why Snapchat's parent Snap Inc.'s IPO will be the most high-profiled and controversial internet IPO this year. The firm's view comes amid the impending IPOs of some interesting privately-held companies such as Uber, Ant Financial and AirBnB in the sector.

Lasting Hurdles For SNAP's Stock

Analyst Rob Sanderson said SNAP appears to be coming public earlier in its development cycle than the others in the pipeline, with the company unprofitable and gross margin just crossing into positive territory. SNAP has more established competitors in leadership positions such as Facebook Inc FB and its Instagram than the other high-profile private companies.

MKM Partners also said the use-case of SNAP is less tangible to middle-aged money managers than an Uber or AirBnB and the stickiness/competitive moat is much less obvious than Ant. The firm sees this as lasting hurdle for SNAP's stock.

Related Link: A Look Back At Snap's Final Year As A Private Company

Debate Over Valuation

Key Questions Before SNAP

Spotlight On User Growth At Least In Near Term

The firm sees the valuation (55 times trailing sales and 20 times forward sales at the high end) as demanding. The firm also expressed apprehensions over the timing of listing, which has come at a time when user growth has decelerated meaningfully.

Following the SNAP IPO's roadshow in London and the East Coast, MKM Partners said the following questions have emerged:

• Cause of recent user growth deceleration, with doubts over whether it is competition related or platform related?
• Does SNAP offer as much monetization potential as Facebook and Twitter Inc TWTR?
• Can SNAP's business model scale?
• Can the young management team grow the company into tier-one business leaders?

MKM Partners feels the addressable user base for Snapchat is more narrowly defined than other social networks, given the limited opportunity in the 35+ age demographics, the requirement of high-end devices and fast mobile broadband networks, limiting mass market appeal to developed vs. developing economies, and the management focus on regions with high ad revenue potential.

That said, the firm believes the Street would focus on an inflection point on user growth trends in the first quarter. If the user statistics remain disappointing, the firm believes investors may label the company as another Twitter and sell-off the shares. On the contrary, if the metric sees reacceleration, it would lead to investor optimism.