Snapchat’s parent company, Snap Inc., is set to price its initial public offering on Wednesday, allowing investors to decide how much the social media company is ultimately worth.

The company is seeking to raise as much as $3.2 billion and pricing shares at $14 to $16. That would value it between $19.5 billion and $22 billion. The deal is already oversubscribed, according to investors briefed on the matter.

Tuesday’s roadshow in New York drew a standing-room-only crowd of nearly 500 people that one attendee said included “the entire hedge fund mafia.”

Business Insider spoke to a handful of prospective investors and others close to the deal about the pros and cons. In most cases, these people declined to be identified because they were not permitted to speak to the press.

Here are the four key issues prospective investors in Snap are wrestling with:

  • Valuation: Snap’s $22 billion valuation at the top end of the IPO price range has been described as “smart” and conservative. However, Snap has no profits, and one venture-capital firm predicts it won’t stop the red ink flowing until 2020.
  • Slowing user growth: In the fourth quarter of 2016, Snap posted the slowest growth rate for any of the 12 quarters for which it reported numbers. It told prospective investors that the rate was partly due to problems with Android, and that it has focused on quality rather than quantity in terms of users. Still, some are “freaked out” about the slowdown.
  • Monetization: Snap has only just started focusing on monetizing its users through advertising, and Goldman Sachs has forecast that Snap will increase revenues fivefold by 2018. However, some are concerned about Snap’s niche demographic and the management team’s ability to execute. One prospective investor said the success of the sales/advertising part of Snap’s business is “TBD.”
  • The competition: The question of whether Snap should be concerned about Facebook — and Instagram, which Facebook owns — was an important element of the roadshow both in New York and London. On one hand, Snap has a reputation for innovation. On the other, Facebook is a $390 billion giant with deep pockets and a huge user base.

The question of whether Snap should be concerned about Facebook — and Instagram, which Facebook owns — was an important element of the roadshow both in New York and London. In New York, investors asked Snap’s management why they weren’t concerned about Instagram.

One potential investor who has decided not to buy into Snap’s IPO said Spiegel’s answer to that question was reasonable.

Essentially, Spiegel said that Instagram’s Stories feature, built to rival Snapchat’s Stories, is more of a broadcast platform — meaning it’s more geared at social-media influencers, like celebrities, to broadcast to a larger platform. Snapchat Stories, meanwhile, are more personal and meant to be shared among friends, Spiegel said. By his logic, the two should not be seen as substitutable products.

A current investor in Snap told Business Insider:

“I think Facebook is a huge company with a lot of resources. They’re always going to be a risk because they’re a fierce competitor with enormous resources. They’ve consistently tried to kill Snapchat off. [Instagram Stories] isn’t their first clone — this is like their ninth. It’s a risk, but what helps me sleep well at night is that Snap has consistently out-innovated Facebook for five years, and I think that is likely to continue.”

Source: Business Insider

Authors: Rachael Levy and Portia Crowe