The concept of the IPO has been one of excitement and fear for investors since its inception. Since it is only available to a select few, many are unaware of its details and nuances. This mystery, in many cases, drives hype and inflated share prices.

An IPO is essential for a company to make a big presence for themselves in the stock market, and their market value will drive their valuation throughout the lifetime of the company. Snap Inc., owner of the popular video sharing app Snapchat, took on this challenge.

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In a SNAP

Snap Inc. is essentially a camera company. They look to improve the way we all live our lives through collaboration in the form of video. Their goal is to empower all people to express themselves, and have fun while doing it!

Their main revenue stream has come from their ability to monetize their main video sharing application, Snapchat. This app has been massively popular among the rising generation, and the company’s user acquisition has been phenomenal!

In the past two years, Snapchat has grown from 71 million active users, to over 158 million. That is impressive to just about anyone. What makes them so powerful? Millennials. The power of viral software and social media have changed life as we know it, and has grown companies (like Snap) from nothing into global powers.

On a Thursday morning in March, Snap Inc. went public. The trading of their shares amounted to almost 10 percent of the total trading on the NYSE that day. (Balkarishnan, 2017). They made a big impact on their first day, and many believe that they are poised to become even more valuable as time goes on. Unfortunately, not everyone agrees.

Global companies need to constantly shake things up in order to stay on top. Snap has tried to tackle this problem with their release of Snapchat Spectacles, their payment platform, and of course their app!

No one is questioning the validity of their idea, or the incredible growth and market share that they control, but there is a very valid concern with the financial future of this tech giant.


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From the Numbers

Setting an IPO value is a tricky and complicated process, which needs to revolve around raising capital for the company, as well as creating happy shareholders and investors (Bhuptani, 2013). This process, for Snap Inc., was even further complicated by that fact that they have never had a profitable year.

This fact is stunning to many investors. How can a company think they are able to provide value to their shareholders, when they can’t even seem to get themselves out of the red?

Snap needs to control the slide. It would not be a substantial concern for a company to go through its IPO while returning negative revenue, as long as it was poised for growth. However, it seems as though the slippage is increasing! Revenue was further negative in 2016 than it was in 2015. Now, worry is a very valid reaction.

Then, there is its valuation.

“Its net worth (assets minus liabilities) is just $1.5 billion. By itself that's not a problem. But when compared to its $24 billion price tag, it is a cause for worry.” (Berger, 2017)

Many companies grow in value with an IPO. No concerns there. The concern is where that valuation is coming from. We have already mentioned that Snap is operating with money they don’t have. Losses are hard for businesses, but turning up negative year after year is not a sustainable model. Snap itself has warned that it may never achieve or maintain profitability! (Huston, 2017)

This is concerning because their market share and growth are slowing significantly as others begin to mimic their ideas. Social popularity is a very fragile thing. Snapchat doesn’t have much more room to expand its reach, so it needs to find a way to control its assets and company to turn this drop around.


Disappearing Video, Disappearing Value

We are in the age of the social media boom. However, for every boom there is a fall. “We are at the tail end of the social media boom. Novelty is giving way to fatigue," (Kharpal, 2017).

The big question on investor’s minds is what happens when the user base moves on. How will Snapchat be able to cope? Even now there are other social platforms which are mimicking the model. Instagram Stories have already slowed the growth of Snapchat’s user base in just a few months. There needs to be an end game, but Snapchat does not seem to have one.

Many companies have made risky bets, and that is what makes many of today’s global businesses successful. The only real problem with the current state of Snap, is that they have based their value on things that are seasonal and very volatile. All of their users could disappear tomorrow. How do they convince the world to use their platform, when it required an infrastructure of high-bandwidth data not found in many countries? When will the next global tech startup take over?

Without the power to continue bringing money into the company, the business will die. I believe that they can fix this problem, and there are some very intelligent minds at Snap Inc. that are capable of making it happen, but the success of the business itself will depend on their ability to create value even when the users don’t.


As the Dust Settles

When everything is considered, decisions need to be made. Especially in the stock market, those decisions need to be based on enough information to make an educated choice that will be financially beneficial.

As explained, when all is said and done with an IPO from any company, it’s future value rests on its ability to make money for its shareholders.

As time goes on, investors will begin to set their sights on the reality of the company, and its ability to drive revenue. Soon investors will begin to consider the first earnings report (Fiegerman, 2017), and reality will start to set in.

Reality will not be kind to the company, considering that most of it’s prowess is built solely upon the viral nature of it’s app. Another factor, is that it’s two founders are retaining over 88 percent of the company, as well as virtually all voting rights. This is problematic considering the fact that they are so young and inexperienced in the business world we face today (Hiltzik, 2017).

A company that can gain millions of followers seemingly overnight, can also lose those followers just as easily. This company, like many others, is built on a shaky foundation, and investors should make their decisions very carefully!



Reference:

Berger, R. (2017, March 7). Snapchat IPO: Don’t Confuse Popular with Profitable. Retrieved from https://www.forbes.com

Balkarishnan, A. (2017, March 2). Snap Closes up 44% After Rollicking IPO. Retrieved from http://www.cnbc.com

Hiltzik, M. (2017, February 3). Ignore the Hype About the Snap IPO. Retrieved from http://www.latimes.com

Fiegerman, S. (2017, March 6). Snap’s Post-IPO Gains Just Disappeared. Retrieved from http://money.cnn.com

Bhuptani, R. (2013, November 8). How Does IPO Pricing Work? Retrieved from https://www.forbes.com

Kharpal, A. (2017, January 23). Snapchat is ‘total junk’, not worth $500 million and investors should avoid its IPO, an analyst has warned. Retrieved from http://www.cnbc.com

Huston, C. (2017, March 3). Snap IPO: Six things to know about Snapchat parent company as it goes public. Retrieved from http://www.marketwatch.com

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