Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

When Line makes its debut on the Tokyo and New York markets this week, it will be the only publicly traded chat app. That's a lonely position for a social-networking company.

Since its business model extends well beyond ads and into games and stickers, sizing it up against advertising-driven companies such as Twitter, Google and Facebook doesn't quite work. Unlike the big three social-networking players, Line gets only 35 percent of its revenue from ads. The bulk of sales comes from a combination of content (games and music -- 35 percent), and communications (stickers and themes -- 22 percent). 

Talk Ain't Cheap
Line's IPO puts its implied value per monthly active user in the middle of its peers based on acquisitions or fundraisings
Source: Bloomberg Intelligence

That reliance on non-advertising revenue seems to put Line in the same league as gaming companies like Zynga and Gamania. Line's content business isn't just games, so the metric wouldn't be perfectly comparable. It would be close enough, however, for investors to judge how its business is tracking, and Zynga gets a bit more than 20 percent of revenue from ads anyway.

But to benchmark against games would miss Line's chat-app characteristics.

That leaves Tencent. The maker of QQ and WeChat actually makes more than 50 percent of its revenue from games and licensing, with ads accounting for less than 20 percent of sales. But Tencent's maturity and unique virtual monopoly in China justify a premium for its Hong Kong-listed shares to which Line can't lay claim, as Bloomberg Intelligence analyst Anthea Lai notes:

I doubt if Tencent works as a valuation comparable given it enjoys a much bigger domestic market dominance than Line, and it's been very profitable for many years already. I believe one should definitely discount Line against Tencent.

The six companies mentioned, plus Line's South Korean parent Naver, have a median price-to-sales ratio of 7.33 times. By contrast, Bloomberg Intelligence calculates Line's value at about 5.6 times trailing 12-month sales, an indication that something may be missed in how the IPO is being priced.

One way to value Line might be to employ a sum-of-the-parts method often used for conglomerates. Games revenue could be benchmarked against multiples for similar peers, likewise for advertising, and so forth. To do so would fail to account for the one characteristic that Line brings to this portfolio and which is hardest of all to value: user engagement.

IPO Expectations
Hopes for a Line listing have helped drive shares of parent Naver
Source: Bloomberg

What allows Line to generate sales is the fact that users open up the app multiple times per day to get in touch with friends, swap gossip or share information. The same can be said for its larger rivals Facebook Messenger, WhatsApp and WeChat, yet none of those has so far shown an ability to keep getting users to voluntarily part with their money.

Line itself says its cash-extraction skills are key, noting in its filing that with user growth slowing, "our ability to increase monetization of our users has become more important in order for us to maintain or increase the growth rate in our revenues."

Lacking peers isn't necessarily a bad thing. Investors who are long or short can use Line's unique model to justify their positions. 

With the IPO pricing today at the top of the range, at 3,300 yen ($32.40), and Naver exercising its option to sell more shares, it appears the bulls are winning that argument.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net