Here Is Why IPO-Bound Line Is Just an Over-Hyped Technology Stock
Amid a global economy still in turmoil over the Brexit, Japanese messaging application company Line hiked the price of its initial public offering over the weekend to a stunning 2,900 to 3,300 yen a share, but the stock may not be the right choice for investors.
Previously estimated at 2,700 to 3,200 yen, the IPO could now raise as much as $1.3 billion and is set to be the highest technology IPO of the year. Line will offer 35 million shares when its stock goes public this summer in a twin listing spread between New York and Tokyo stock exchanges.
However, the company has had stagnant growth and is unlikely to expand its user base any more, meaning that Line has effectively reached its peak.
Line said that the higher IPO price was a result of strong demand and appropriate market conditions, despite the uncertainty still associated with the U.K.'s June 23 vote to leave the European Union.
The hike suggested that investors were drawn by steady returns from a core market, as Line has an established 218 million monthly users. However, user growth has stagnated for the app, and it has received little attention outside Japan, Taiwan and Thailand.
Line has plans to use the funds from stock investors to expand its marketing beyond Asia. The company hopes to bring its app to Europe and the U.S.
Although the company will garner attention for its unusually high IPO price, Line may not be a smart foreign investment. Despite the high valuation, Line has consistently posted losses since 2011, with only one net profit posting of $19 million in 2014.
Line is preparing to tackle some heavy competitors in the global field, including Facebook's WhatsApp with 1 billion monthly users and Facebook Messenger with 900 million monthly users. Despite the Japanese messenger app's bold ambitions, Line's competitors may be too firmly established for the company to find much growth beyond its current user base.
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The app only had 6% user growth for the year ended in March. Previous years showed user growth numbers of 30% and 112%, much of it fueled by WordPress enterprise users.
Meanwhile, Facebook Messenger's user base grew 13% between January and March.
Higher IPO price aside, Line's numbers don't show signs of growth and instead have sharply stagnated. Chances that the app will break into the global marketplace seem to have come and gone, and the company's valuation has declined steeply since 2014.
Fund managers have suggested that despite the high IPO price, Line would have done better to go public in 2014, when user growth was still massive for the app. However, Line chose to hold off on listing the stock in the hopes of better market conditions, which never materialized.
The two-year delay may have cost the company billions. Line's valuation was estimated at $10 billion in 2014 but is currently estimated at $6.5 billion. The delay allowed Facebook Messenger and WhatsApp to encroach further into Line's potential market, undercutting its ability to grow and expand.
Investors looking for a company that offers growth will do better to skip Line, as it looks as if the messaging app's glory days of growth and expansion are behind it, and its user base is firmly established in Japan. Facebook still poses a safer investment, and data indicate that Facebook Messenger, the fastest-growing app last year, still offers plenty of growth.
The stunning IPO will only be relevant for a short while, and nothing else suggests that Line has a solid foothold outside Asia.
Without an indication of how the company plans on usurping Facebook Messenger and WhatsApp's users, Line risks becoming another example of an over-hyped technology stock that generate little financial growth. Investors are better off putting their money in stocks that haven't used up their potential.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.