Why Snap Will Be The Most Controversial Internet IPO This Year

Debate Over Valuation

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.

Key Questions Before SNAP

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?

Spotlight On User Growth At Least In Near Term

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.