Will SnapChat’s IPO Live Up to Expectations?

By February 16, 2017featured
Will SnapChat’s IPO Live Up to Expectations?

SnapChat has filed for a long-awaited IPO, with investors seeing the company’s market valuation at $20-25 billion, versus its current value of $17.8 billion.

The move has been eagerly awaited by the tech investor community because of the slowing down of IPOs over the last few years, with 2016 seeing just 150 offerings, versus 275 two years earlier.

SnapChat’s IPO filing, however, caused excitement because it’s not just any private company: the picture-sharing platform operator is of the unicorn breed: private companies valued at over $1 billion. Still, investors have been wary so far, because previous major tech IPOs have failed to live up to expectations. Private companies have also been wary, afraid they might not get their company’s worth from a listing. Hence the vicious circle of declining IPOs.

Against such a background, SnapChat’s plans could be welcome as a beacon of hope for tech-focused investors. On the other hand, maybe not, given the issues surrounding the listing.

To begin with, there are the financials: the dotcom bubble burst in large part because investors were too hungry for the digital industry and failed to pay attention to the actual financial performance of the companies they were flocking into.

SnapChat has been posting massive increases in revenues, with the figure for 2016 7 times higher than that for the previous year, at $404.5 million. Yet, on the profit front things were in negative territory, at $515 million, a 38% increase on the loss for 2015. So, revenues are growing but so are losses.

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There is also the issue of valuation. Reports have said that Snap, the parent company, will aim for $25 billion. This, according to Fortune, gives it a P/S ratio of 61.7 – substantially more than Facebook’s 12.6, Google’s 5.2, or Twitter’s 4.2. In other words, SnapChat values itself at 61.7 times its revenues, which is pretty ambitious, especially given its growth prospects.

Let’s say SnapChat is growing too fast and it needs to catch up with itself to start posting profits. But there is also another thing that should make investors wary, as Fortune notes in an analytical piece on the IPO news: SnapChat has no plans to start paying cash dividends. This means that shareholders’ returns would be limited to stocks and stock options –an uncertain prospect in the uncertain world of social networks.

Yet another problem is SnapChat’s strategy which focuses on a more limited audience than, say, Facebook, to which the photo-sharing platform is often compared. The daily average of users for December 2016 stood at 161 million and is unlikely to grow much from now on, IPO or no IPO, as stated by the company itself.

For investors this heightens the uncertainty of future returns: SnapChat is banking on its already substantial popularity in certain geographical areas, notably the U.S. and the Caribbean, with the former being the biggest advertising market in the world and SnapChat lives on ad revenues.

Yet the social media market is extremely dynamic and it’s hard to say when the next competitor will emerge and take a bite out of SnapChat’s audience. It appears that the company is targeting a niche market of a certain demographic, which means it needs to persuade its users to use the app more and more and more, at the same time getting the best prices advertisers can offer, in order to ensure a stable flow of returns. In such a dynamic market this looks a risky approach, especially since the company itself admits that a substantial part of its usual demographic, the teens, is not “brand loyal,” which would make its task even harder.

On the other hand, what’s possibly its biggest problem – the focus on a niche market – could be seen as SnapChat’s greatest advantage. In its approach to advertising targeting, the company is distinctly different from Facebook: it doesn’t do data-driven advertising, which, according to CEO Evan Spiegel, is “creepy”. Avoiding the creepiness wins both users and advertisers: the former are not annoyed by too many ads and the latter know exactly who will see their ad.

SnapChat’s IPO, likely to take place in March, will certainly be watched closely by investors and other private companies that for the moment are resisting going public. How the placing goes will likely set the tone for listings for the rest of the year. This is what should make investors especially wary in the context of all issues identified by analysts as potential spokes in the wheels of the company’s growth.


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