Best Thing Since Facebook? Investor’s Anticipation of Snapchat

By Sean Fard

What started in a Stanford dorm room in 2011 has grown from a trendy redoubt for millennials into a top destination for both general users and advertisers. Snapchat (“Snap”) started as a way for friends to send self-destructing photo messages, but has since added more ambitious tools, from letting users compile “stories” about their days to paid-for content like the Wall Street Journal, Vice, and KFC, to name a few.

Since its launch, Snap’s user base has grown exponentially. Starting with only a mere thousand users, the company now dominates the social media platform with over 158 million Daily Active Users on average. Now over 150 million active users and 7 billion daily video views later, the company has prepared for one of the most anticipated IPO’s of the decade.

So, what does Snap’s IPO reveal about the company?

In its prospectus filed on February 16th, 2017, Snap’s revenue was revealed to be $404.5 million for the year of 2016, as compared to $58.7 million for the prior year. With the company showing a nearly seven-fold increase between 2015 to the present, prospective investors will be drawn to how quickly Snap has grown its advertising business. The question is how long can the start-up maintain that kind of growth?

Potential investors are likely to question whether Snap can maintain an enviable user growth rate, particularly as Facebook has unabashedly copied many of the service’s top features within Instagram. The company laid out a number of risk factors that can affect its business. Among them is User Retention, as the company has seen a decline in its older users.

We anticipate that the growth rate of our user base will decline over time. If we fail to retain current users or add new users, or if our users engage less with Snapchat, our business would be seriously harmed.”

The company laid out its goal as it acknowledges that their financial performance will increasingly depend on its ability to elevate user engagement. If the company cannot maintain or increase the frequency and duration of its active users, there will be a risk that Snap will follow a similar trend to its competitor Twitter. (Twitter‘s stock is down about 22% in the last year and 16% year to date following disappointing results in the first three quarters and an unsuccessful effort to be acquired.).

While User Retention seems to be one factor in the minds of prospective investors, those same investors may also question how long Snap will take to reap profits. The company has disclosed that it lost $514 million last year, widening from $373 million in 2015. The majority of its expenditure comes from its business with Google, as it relies primarily on Google Cloud for the vast majority of computing, storage, bandwidth, and other services. “We have committed to spend $2 billion with Google Cloud over the next five years and have built our software and computer systems to use computing, storage capabilities, bandwidth, and other services provided by Google, some of which do not have an alternative in the market.” Given this information, it seems as though Google will also play another significant factor in Snap’s future success.

In advance of its public offering, Snap aimed to value itself at a whopping $20 billion, in an initial offering of 200,000,000 of shares, currently estimated to be between $14.00 and $16.00 per share. (Prices rose to $27.00 per share the day after Snap’s IPO, but shares of Snap have recently been trading at around $20.00 per share.) With all this in mind, it is important for investors to gauge what their investment goals are before deciding that Snap is the right investment for them. As the anticipation grows, investors need to conduct their research and question the hype before jumping into any investment on a whim, as nothing is guaranteed.