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Here's why Snap is playing it safe with investors

As Snap opens its roadshow, here is what investors think of valuation on the social media app's initial public offering.

Snap CEO Evan Spiegel.

Snapchat executives hit the road on Friday to lure investors into what could be the biggest tech-sector stock offering in years.

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The schedule of meetings will take them to London on Monday, and New York on Tuesday, and eventually across the US. And if it's like other high-profile tech deals of recent years, they'll draw a standing room only crowd of analysts and fund managers looking to get a feel of what the buzz is about.

Already, though, Snap Inc. has raised some eyebrows on Wall Street. After people close to the company floated the idea that it would be valued at up to $25 billion — for months — it hits the road with a price range that puts its maximum value at closer to $22 billion.

It's not a massive difference, but it was enough to raise the question of what happened. There are plenty of reasons for investors to be skeptical of the company's disappearing message app. One is simply that its user base is young, and that means plenty of decision makers on Wall Street won't even understand what it is.

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Snap knows this and one video posted on its website for investors Friday is simply a lesson on how the app works. People close to the company said that preliminary meetings with investors and analysts, late last year, included this lesson.

Then there's the question of its valuation. Even if $22 billion is lower than it might have sought, the company only reported $400 million of revenue in 2016 and no profits. Also, it has a share structure that means investors paying that will get no say in how it is run.

So is that all getting baked into the price already? Maybe. Reuters reported that one reason for the slightly lower valuation reflected feedback from those preliminary meetings.

One person close to the situation told Business Insider that Snap is playing it safe with the intention of going higher as soon as demand merits. Conversely, asking for the full $25 billion and being forced to roll it back if investor demand isn't high enough would be a worse outcome that taints the company's trading debut.

The company said Thursday it was seeking to price shares at $14 to $16, but this person — who asked not to be identified discussing the situation — said the only acceptable price, in reality, will be $16 per share or more.

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This person expects Snap's order book to be oversubscribed, meaning there will be demand for more shares than it is selling.

"If you look at Twitter, Facebook, or Alibaba, there's a pretty

Part of that means users must have higher-end smart phones. Snapchat works best on iPhones, and while some problems persist on Android and other phones, Spiegel says he will not dilute the product to make it work on every phone.

So unlike Facebook, which has nearly 2 billion users around the world, Snap will not focus on non-iPhone-using customers in places like the developing world because those markets are not easily monetized. The logic is that advertisers want to reach North America and develop Europe rather than the rest of world.

In the company's roadshow materials, it said its biggest revenue opportunity is the growing budget for worldwide mobile advertising, which could reach $196 billion by 2020 from $66 billion currently.

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Snap's business is to "create the best camera platform so we can drive engagement and monetize that engagement through advertising," Chief Strategy Officer Imran Khan said in the video.

"While on an absolute basis, the valuation appears high from an investor's risk/reward perspective, I think Snap becomes very much the next Instagram, or possibly bigger," the existing Snap investor, whose fund has a $150 million stake in the company, told Business Insider.

Instagram, a photo-based social media network, is owned by Facebook.

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