After two years of delays, the initial public offering (IPO) of Japanese messaging service Line (LIN) - Get Report (proposed) is set for a dual listing in New York and Tokyo on July 14 and July 15, respectively.
But investors should stand clear. There are better places for their money. The company's growth has been slowing and its profits have been erratic. Moreover, Line faces tough competition from the likes of Facebook.It could have picked a better time for its IPO.
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What started as NHN Japan, a communication channel to compensate for lost lines after the 2011 earthquake and tsunami in Japan, is now one of the country's most widely used messaging platforms. Japan, together with Thailand, Indonesia and Taiwan are the four markets that contribute over 50% of Line's 218 million monthly active users.
According to research from Statista, Line is seventh on the list of most used apps, after Facebook's WhatsApp and Tencent's WeChat, which is extremely popular in China.
As per the price range set for the IPO of $26.50-31.50 a pop, Line could be valued at $6.57 billion, making it the biggest tech IPO of the year. Another IPO in the Tech space, Twilio, which listed a day before Britain voted to leave the European Union has seen shares pop about 30% over the past week, an indication of the voracious appetite of investors for new listings in the technology space.
However, a closer look at Line's financials and plans suggest that the company has problems.
Two years ago, Line, currently owned by South Korea's online search giant Naver Corporation, would have been valued at $10-$20 billion, according to some observers. However, the company decided to hold off the IPO to tweak its business plan, address weak financial controls and ramp up its manpower.
Chief executive Takeshi Idezawa who joined last year, spearheaded significant changes. Line now boasts 750 additional workers including designers and engineers. Still, Line is staring at stalling sales and users growth, among other issues.
Over the past three years, the number of monthly active users tripled. But that slowed significantly last year.
A majority of Line's revenues come from sales of emojis and electronic stickers, with Brown the bear and Cony the rabbit garnering huge fan following. The service is also popular for games.
Rivals like Facebook Messenger now also offer emoji for free, forcing Line to explore newer revenue streams.
As a result, it has ventured into video, music streaming, mobile payments and taxi hailing.
But profits from these initiatives and overall have been erratic.
The company registered a loss of 6.4 billion yen in 2013, made a profit of 2 billion yen in 2014 and lost 8 billion yen in 2015.
Lack of profitability wouldn't be a lasting problem if revenues were soaring. After growing from 6 billion yen to over 120 billion yen from 2012 through 2015, Line recorded first-quarter 2016 revenues of 33 billion. Even if it continues at this pace, there won't be a marked difference from the previous year.
Also, with Facebook Messenger and Whatsapp dominating global market share with their 900 million and over 1 billion users, respectively, and China being restrictive in its messaging services, Line may have to rely on its existing, four key Asian markets to grow.
Indonesia's smartphone users are expected to grow to about 100 million at an annualized rate of around 11% from 2016 through 2020 making it the fourth-largest smartphone market in the world.
Even if the company convinces investors of its future plans and potential, the timing of the listing is sensitive. Twilio may have been lucky to pop despite Brexit disrupting world markets, but Line, with slwoing growth unreliable profitability, looks unlikely to generate rewards for value investors.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.