Japanese messaging company Line (LN) went public in July as the biggest tech IPO of the year. After raising $1.3 billion in its market debut, the stock has rallied about 30% from its IPO price of $32.84.

However, analysts remain divided regarding the future of the company. The bears believe that Line will struggle to grow in a crowded market of messaging apps, but the bulls believe that the company can monetize new services and expand into new countries. Let's examine both arguments and see if Line is more likely to sink, swim, or tread water over the next few years.

Image source: Line.

Why Line could sink...

During the second quarter, Line's monthly active users rose 4% annually to 220 million. That represents a slowdown from 7% growth in the previous quarter and 24% growth in the prior-year quarter. Line's revenue rose 20% to 67.3 billion yen ($652 million) during the first half of the year, but that growth could slow considerably if its MAU growth stalls and it runs out of ways to monetize its existing users. Line's ad revenues were strong last quarter, but revenue from its mobile games (which are tethered to the app with single sign-ons) fell 5%. The recent rise of Pokemon Go could further throttle that growth as people turn to that game rather than Line's.

Line's user base is growing at a slower rate than Facebook's (META -0.33%), which grew its MAUs 15% annually to 1.71 billion last quarter. Facebook Messenger, the monolithic chat app that competes directly against Line, hit 1 billion MAUs in July -- up 30% from a year ago. Facebook's WhatsApp also topped 1 billion MAUs in February, also rising 30% from the previous January.

As users become tightly tethered to Facebook's ecosystem, the demand for stand-alone messaging apps like Line will likely decrease. Line's user base is also heavily concentrated in four countries -- Japan, Taiwan, Thailand, and Indonesia -- which account for about two-thirds of its MAUs.

Line Bubble 2. Image source: Google Play.

The rest of the messaging market is also heavily fragmented among major regional players. Tencent's WeChat is the dominant messaging app in China. Its MAUs grew 39% annually to 762 million during the first quarter of 2016. Viber, which had 249 million MAUs as of last April, is popular in Vietnam, the Philippines, Ireland, Russia, the UAE, and India.

According to SimilarWeb, Facebook Messenger, WhatsApp, and Viber were the only three messaging apps to hold a major presence in more than 10 countries. That dominance could prevent Line from expanding into new markets to reach new users.

Why Line could swim...

Despite those challenges, Line believes that there is still room to grow. The company generates just 29% of its sales from markets outside of Japan, indicating that it could still boost its average revenue per user in Taiwan, Thailand, Indonesia, and other Asian markets before expanding further.

To do so, Line is adding a lot of services -- like mobile payments, ride hailing, deliveries, chat bots, live music, and video streaming -- to its monolithic app. The company likely hopes that these services will expand its ecosystem and prevent its users from relying on other messaging apps. Line also generates a large portion of its revenue from sticker sales, and offers free branded stickers for companies in exchange for users "friending" the companies or buying certain products and scanning the QR codes. It also offers free stickers to users who download its first-party games.

Line posted a net profit of 2.6 billion yen ($25 million) during the first half of the year, which was an encouraging reversal from its loss of 5.3 billion yen ($51 million) a year earlier. Line also recently declared that it plans to use the $1.3 billion raised from its IPO on acquisitions, which could strengthen its AI, chat bots, advertising, video streaming, games, and AR features. If the company makes smart buys in those markets -- as Facebook did with Instagram and WhatsApp -- it could find new ways to monetize its users, reach additional countries, and widen its defensive moat.

The verdict: Line will likely tread water

In my opinion, Line won't be marginalized by Messenger or WhatsApp in its core markets, because it has a strong first mover's advantage among those users. But I believe Line will struggle to expand its presence very far beyond those countries, due to Facebook's growing ecosystem and the strength of regional leaders like WeChat and Viber.

Line could generate more revenue per user with new services, but it could eventually run out of ways to boost its total sales without fresh user growth. I suspect Line's stock will tread water until the company either grows its MAUs in a consistent manner or aggressively expands with some big acquisitions.