Line: Treading a fine one

Faint praise, but next week’s initial public offering in Tokyo and New York from Line, the messaging app expected to raise ¥106bn ($1.1bn) should be the year’s biggest, both for Japan and the global tech sector. The drought has been so severe that this alone is worth celebrating. Only 21 companies have raised more than $500m in IPOs in 2016 compared with 48 at this time last year, with particular weakness in tech.

Line, owned by Naver of South Korea, is an established name — less familiar in the west but big in Japan, Thailand, Indonesia and Taiwan. Rare among newly public tech companies, it makes money after stripping out such inconveniences as interest and tax, it almost makes net profits: in its latest quarter, it lost just ¥234m ($2m).

Line’s problem is growth. There is not much of it. Annual growth in monthly active users, a key metric for social networks, fell to 6 per cent at the end of March. A year earlier it was growing at 29 per cent. A year before that, it was 112 per cent. This looks very much like the stall suffered by Twitter. At IPO in 2013, Twitter’s users were increasing at 98 per cent a year. The growth rate now? Less than 3 per cent. Investors usually buy internet stocks at IPO for their growth potential; that Line boasts a healthy bottom line might count for little if it cannot offer much hope of acceleration at the top of the income statement.

It makes it a tough sell, and a cautionary tale for other unicorn owners delaying their exits. However, that does not mean Line is doomed to be crushed under the weight of bigger messaging apps. Line had 218m monthly active users in March. Tencent’s WeChat boasts about 800m MAUs, Facebook Messenger has more than 900m, WhatsApp passed 1bn in February. Line’s stronghold of Japan, where it has 61m users, has defied the dominance of the biggest social networks. Japan has not embraced Facebook as ardently as other markets; it is the only major market that prefers Twitter, and both are dwarfed by Line. The company has proven quicker and more successful at introducing new features like paid games and stickers.

This week’s increased offer price implies a multiple of less than four times revenues for 2016 at current growth rates. That could make Line an attractive target. Failing that, if it can defend its territory, continue to wring more money out of existing users, and find some growth in other markets, it can earn its valuation — and real praise.

Email the Lex team at lex@ft.com