Two Big Questions About Snapchat IPO
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Snapchat parent company Snap Inc. on Wednesday sold its first shares of stock to the public at $17 a share, or a market value of $24 billion, including outstanding equity. The stock opened at $24 and closed the day at $24.48, a 44 percent premium to the people who bought it yesterday. The stock sale set Snap up as the most valuable American company in the technology circle to go public since Facebook nearly five years ago. It’s also one of the most awaited IPOs since Twitter and Uber.

In terms of payouts, it’s too early to say if Snap, Inc. is able to deliver what the Wall Street wants: impressive profit margins. Twitter too had a gung-ho debut, but its stock soon fell below the $26 IPO price. Facebook, on the other hand, was a mess on day one but is now one of the most valuable companies on the planet. Then again, it’s too soon to tell if Snapchat IPO buyers will be handsomely rewarded. There is a possibility that Snap shares could fall flat on their face within the first week after trading.

Snapchat Largest Tech IPO on Record, Valued at $24 Billion

Snapchat’s business is largely based on intangible assets. While it’s growing strongly (158 daily active users as of February 2017), it isn’t expected to make profits in the near future. Although, it looks like it’s beginning a bigger trend: investors valuing companies that haven’t reached profitability yet.

The popular mobile app’s business is based on long-term user relationships. Normally, such businesses require substantial upfront investment in growing their user base. This audience is monetized over time, turning highly profitable once break-even is reached.

Evan_Spiegel_at_TechCrunch Snapchat IPO

Evan Spiegel at TechCrunch.

With such businesses, trade pundits are quick to point out that the company is losing money. For shareholders, engagement is only valuable if it can be monetized. While Snapchat monetizes on ads, most of the ads appear in between “Stories”, series of photos and videos. In addition, the company has been largely successful in launching new features. To monetize the camera interface, it has launched branded geofilters business which gives individual and businesses the opportunity to purchase filters inside Snapchat’s popular stickers section. For example, Budweiser launched a Snapchat advertising campaign for the 24 hours leading up to the Super Bowl. The campaign reportedly let you play a mini-football game within the app. If you won, you unlocked an exclusive filter to use.

Snapchat IPO Prospects

Snapchat’s quarterly average revenue per ad of $1.05 per user lags behind Facebook, which is at $3.9 per user. While its ad revenue lags behind Facebook, Snapchat’s advertising business has grown. In fact, it is on track to make $377 million in advertising sales this year. Just forty months ago, Facebook was desperate to buy Snapchat for $3 billion. Between 2013 and 2015, Facebook tried to take on Snapchat more than ten times: two acquisition attempts, two ephemeral messaging implementations, four standalone apps, and a dozen or so clone attempts. By the end of December 2016, the flagship social network has copied 15 Snapchat features, including photo filters and stickers.

According to eMarketer, Snapchat is expected to rake $935.5 million, a 151% year-over-year increase by the end of next year. Some of Snapchat’s ad partners includes 4C, Adaptly, Amobee VaynerMedia, Brand Networks, SocialCode, TubeMogul and Unified.

Highlights:

  • Roster includes Burberry, Calvin Klein, Cosmopolitan, CNN, Domino’s Gucci, NFL, General Electric, Starbucks, Taco Bell, Starbucks, Victor’s Secret, and People.
  • Added more 25-to-34-year olds, an increase of 103 percent, and users over the age of 35 (an 84 percent increase) than 18-to-24-year olds in last twelve months.
  • 158 million daily active users, creating 2.5 billion snaps per day.
  • Projected ad revenue is $935.46 million.

Snapchat’s debut also draws similarities to Twitter’s, which went public in 2013. The micro-blogging site went public with an offering price of $26, and the stock climbed $70 at the end of 2013, and then dove as low as $15 in the Spring of 2014. Today, the company is in serious trouble justifying its lofty valuation as it struggles to sustain growth and effectively monetize its platform. To say that Snapchat wants to avoid Twitter’s fate would be an understatement.

Founder Evan Spiegel is determined to make the technology work, rather than change behaviors like the ephemeral nature of communications. Snapchat told its investors it expects 2017 revenues to increase to between $500 million and $1 billion, an impressive figure for a seven-year-old company. As for comparison, it took Facebook six years to peak $1 billion in sales, and Twitter, eight years.

But, the question remains:

What metrics can we refer to in order to determine Snapchat’s future performance?
How do we determine the sustainability of Snapchat’s post-IPO performance?

A lot happens after the first day of trading. Post Snapchat IPO, Spiegel is going to have to prove to its investors that it’s worth the hefty valuation. Let’s not forget that Snapchat started out as a selfie app, which then turned into a new way of communication. If Snapchat stays true to its long-term focus of reinventing the camera, it could become a champion for investors who like to play in the risky space.

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Follow Anna Domanska on Twitter, Facebook & Google.

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