Japanese messaging company Line Corporation (Private:LIN) has released pricing and share info for its upcoming IPO, but there are plenty of questions surrounding this company's prospects even before you think about the tumultuous stock market.
Line's IPO will be the largest tech company IPO this year, as it will sell 22 million shares in New York and 13 million in Japan around July 15. The company has a target price of $26.50-31.50 per share, and could raise over $1 billion.
Outside of Twilio's (NYSE:TWLO) successful IPO, which just rocketed up another 10% in its share price this week, it has been a slow year for tech companies going public. As a result, investors should have every reason to be interested in a new, exceptional tech company.
Line is not an exceptional tech company. It has a solid consumer base in East Asia, and is the most popular messaging app in Japan. But Line is neither profitable nor growing fast enough to persuade investors that it can be profitable in the long term.
Lining up Line
As noted above, Line is a messaging company that is comparable to Facebook's (NASDAQ:FB) WhatsApp. It has 218 million users and is the biggest mobile messaging app in Japan, Taiwan, and Thailand. Line also states in its SEC filing that it has "gained substantial numbers of users" in Indonesia, Myanmar, Singapore, and Malaysia.
The company makes its money largely through selling digital stamps and games. Users can paste these stamps, which are cute images similar to emojis, on their messages to friends. Line has also launched a live streaming music app and mobile personal finance payments, and has become one of the biggest social media companies in Asia.
But while Line has become a major messaging app, it has not had a history of profitability. Although it made a ¥2 billion profit in 2014, it also lost ¥6.4 billion in 2013 and almost ¥8 billion ($71 million) in 2015.
The growth problem
Many tech companies have gotten away with a record of losses by reporting rapid growth and promising that said growth would lead to future profits. Amazon (NASDAQ:AMZN) did this for years until it became truly profitable, and Twitter (NYSE:TWTR) has promised the same thing.
But Line's growth has stalled. From 2012 through 2015, the company's revenues grew from ¥6 billion to over ¥120 billion. In the 2016 1Q, its revenues were just ¥33 billion. And Line's user base grew by just 13 million from March 2015 to 2016, compared to 46 million from March 2014 to 2015.
Line plans to increase growth by targeting other Asian countries, the Middle East, and the United States, and is trying to project itself as a company which can offer steady returns. It also plans to increase advertising to become more profitable.
But Line has to deal with intense competition from other messaging companies. While it may be successful in many Asian countries, Line is blocked in China, where WeChat is dominant. And throughout much of the globe, it finds itself going up against the behemoths of WhatsApp and Facebook Messenger. Many investors have a hard time seeing where how the company will continue to grow, and it needs to grow or become more profitable.
And while Brexit may have occurred on the other side of the globe, its economic ramifications do have consequences for this IPO.
Wall Street has taken a pounding for the past two days due to Brexit, as it slid 1.5 percent on Monday after sliding over 3 percent on Friday. And while everyone should expect Wall Street to right itself soon, the market will continue to be more volatile for the foreseeable future.
If the global economy were more stable, then perhaps investors could take a chance on a company which has grown rapidly and could compete with other social media giants. But now is not a good time to take a chance on a relative unknown.
Pass on this one
Line has become a successful company and has a strong footing in some important East Asian countries. But while investors may be interested in sniffing out another great tech investment, this current market should make them more cautious. Line needs to offer either a history of profitability or good growth prospects to show that it will be successful.
It is offering neither. Instead of dealing with this IPO, investors will be better off looking at a more established social media tech company like Facebook. But if world economic conditions stabilize, or if Line can offer a better plan for how it plans to compete and improve, then investors may want to give it a second look.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.