Snap files to raise $3 billion in the biggest tech IPO since 2014

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Snap Inc., best-known for its Snapchat app, is finally going public.

The “camera company,” as Snap curiously calls itself in initial public offering documents filed Thursday, is looking to raise $3 billion on a valuation of between $20 billion and $25 billion. Either way, it would be the largest tech IPO since China’s Alibaba Group Holding Ltd. went public in 2014 with a valuation of $170.9 billion.

Snap reported having 158 million daily active users as of Dec. 31, bringing in revenues of $404.5 million for 2016, a huge jump from $58.7 million in 2015. At the same time, the company’s burn rate soared, with losses coming to $514.6 million last year versus $372.9 million in 2015.

Of potential concern to investors was a warning from Snap that it may never be profitable and that it could also see its user numbers permanently stagnate or decline. “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability,” the company said in its S1 filing. Moreover, it said among many risk factors that “Our Daily Active Users may not continue to grow. For example, although Daily Active Users grew by 7 percent from 143 million Daily Active Users for the quarter ended June 30, 2016 to 153 million Daily Active Users for the quarter ended September 30, 2016, the growth in Daily Active Users was relatively flat in the latter part of the quarter ended September 30, 2016.”

Snap attributed the stagnation and potential decline of its user base partly to users engaging with competing products along with competitors mimicking its products and harming their engagement and growth. It didn’t specifically mention Facebook Inc.-owned Instagram, but that service launched a competing “Stories” feature in August 2016 that is said to be attracting users away from Snapchat.

Investors also may have questions about how much time users are spending on Snapchat. “Engagement is mentioned 103 times in the filing, as was widely anticipated, but the only measure mentioned beyond DAUs is time spent, and it’s not provided on a consistent basis,” said Jan Dawson, chief analyst of Jackdaw Research. “That’s a worrying sign at a time when Snap needs to be demonstrating that its users are not just using the app daily but spending more time in it.”

The reference to itself as a “camera company” may refer not only to its recent augmented-reality Lenses but possibly plans for more devices. “While the description may illustrate its intention to diversify more significantly away from advertising in the future, if the company does intend to diversify away from advertising, it reinforces the early-stage nature of company at the present time,” Pivotal Research Inc. analyst Brian Wieser said in a note to clients.

Among the tidbits in the filing was the revelation that Snap plans to spend $400 million a year on Google Cloud services over the next five years and is negotiating a contract with another unnamed cloud provider to provide back up infrastructure support. Snap has previously used Google Cloud services for hosting, but the $2 billion deal was a serious win for Google Cloud versus much larger rivals Amazon Web Services and Microsoft Azure.

Snapchat has raised $2.63 billion from investors including Tencent Holdings, SV Angel, Lightspeed Venture Partners, Benchmark, General Catalyst Partners and Institutional Venture Partners. The company will list on the New York Stock Exchange.

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