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Snap shares soar in debut after largest IPO since 2014

MarketWatch logo MarketWatch 3/2/2017 Caitlin Huston
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Snap Inc. shares opened up 41% Thursday morning, as the Snapchat parent company made its highly anticipated debut on the New York Stock Exchange.

Shares of Snap (SNAP) opened at $24, above the company’s $17 issue price. Snap sold 200 million shares to raise $3.4 billion, making it the largest U.S. IPO since Alibaba Group Holding Ltd.’s (BABA) offering in 2014. The IPO price commanded an initial market capitalization of $19.7 billion, though that valuation rises to roughly $24 billion on a fully diluted basis. Both figures are above Snap’s last reported private market valuation of $17.8 billion.

See also: Six things to know about Snap as it goes public

Alibaba raised $21.8 billion in its initial offering, but that total rose to $25 billion after underwriters also sold the so-called green shoe, extra shares companies make available at IPO time. Snap offered its underwriters the option to purchase up to an additional 30 million shares in its green shoe, and will disclose at a later date if they were sold.

Snapchat has grabbed the attention of a generation of younger smartphone users, who post and share photos and videos on the app that can disappear after a set amount of time. The app—developed by Stanford University students, two of whom are still executives at Snap—had 158 million daily active users on the Snapchat app as of December 2016, according to the company’s prospectus.

The app launched in 2011, but generated no revenue until 2015. While advertising efforts have ramped up since, with total revenue reaching $404.5 million in 2016, the company is paying far more to keep the service running and generating huge net losses.

Snap has big plans for the future, though. The first hardware offering from the company—Snapchat Spectacles, sunglasses that have a small camera installed and can upload video to the app— launched last year, and executives described Snap as “a camera company” in the run-up to the IPO. The app also has a payments feature called Snapcash.

Snap will have to fend off rivals for its core business as it attempts to develop new sources of revenue. The company admitted in filings with the Securities and Exchange Commission that it experienced “increased competition” in 2016, which many understood as an acknowledgment that Facebook Inc.’s (FB) Instagram Stories offering had managed to steal traffic away from Snapchat’s feature that is also called Stories.

“We face significant competition in almost every aspect of our business both domestically and internationally,” Snap stated in its prospectus.

Snap initially set a price range of $14 to $16 for the Class A common shares it sold in the IPO, which do not have voting rights, a rare and potentially unprecedented move. The Snap co-founders who are still with the company, Chief Executive Evan Spiegel and Chief Technology Officer Bobby Murphy, will together control more than 88% of voting power in the company thanks to that move. 

While the app was established on the Stanford campus, its founders did not stay in Silicon Valley. the company is based in Southern California, in the city of Venice, where small offices containing some of Snapchat’s nearly 2,000 employees are scattered around the city.

Snapchat is the first major venture-backed tech IPO of 2017, after the number of such offerings plummeted in 2016. There were only 21 U.S. tech IPOs in last year, according to global IPO investment adviser Renaissance Capital, which said 2016 was the worst year for IPO returns since 2003 and had the lowest number of offerings since 2009.

Morgan Stanley and Goldman Sachs were the lead underwriters on the offering.

Related: Can IPO market Snap out of its doldrums?

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