Snapchat IPO

Chances are, if you’re a uni student that doesn’t know about the image messaging app, Snapchat, you’ve been living under a rock. Snapchat has been featured a great deal in the news recently, due to the fact its parent company, Snap Inc., has recently transformed from a privately held company into a public company and is currently traded on the New York Stock Exchange. This followed the first release of its shares to the public, known as an Initial Public Offering (or IPO for short), which was offered to large institutional investors at $17/share. Given the estimated shares outstanding of 1.16 billion, the IPO placed the valuation of the company just shy of $20 billion.

What’s the significance of Snapchat going public?

The listing of Snapchat is significant because it has been the first tech company in a long while to go public. Growing tech giants such as Uber (valued at around $60b) and AirBnb (valued at $30b) have been insistent on remaining private companies, despite the numerous benefits that public companies have in terms of financing and future company growth.

The story after the IPO

It was looking breezy for Snap Inc. shortly after the IPO. Shares closed on the first day of trading at $24.48, a gain of 44% above its IPO price of $17. Snap shares surged again on its 2nd day of trading to a close at $27.09. But as you can probably see from the graph, the story since those first two days has been quite the reverse, with shares closing on a low of $19.54 just last Friday.  

Source: MSN Finance

Why the price drop?

The primary reason for the price drop is that many renown investors and institutions believe Snap to be a risky investment and one that will not be profitable in the long-term. Many renown Wall street stock pickers, such as Morningstar and Atlantic Equities, have given the company a ‘sell’ rating and investors have been lining up to short-sell the stock. Analysts are also drawing parallels between Snap Inc. and Twitter, which has had its stock price trending consistently downwards since its 2014 IPO. It’s not hard to understand why these firms are sceptical of Snapchat’s success. The company has yet to turn a profit since its 2011 launch, having lost $515 million in the 2015-16 financial year alone. This is primarily due to heavy expenditure on cloud computing infrastructure, which is required to handle the millions of messages sent by users of the application.

Many analysts are also wary of Snapchat’s primary competitor, Facebook, which also operates Instagram. Recent updates have led both Facebook and Instagram to feature similar ‘My Story’ disappearing photo/video functions, which has severely diluted Snapchat’s unique selling points. As Eric Schiffer, the C.E.P. of the Patriarch Organization, previously commented, “Snapchat will be buried alive by Instagram. And users are jumping ship faster than Snapchat can rush their I.P.O. out.” The migration of users from Snapchat to Instagram is already being observed, with numerous analysts pointing to a decline of anywhere between 15-40% of Snapchat users since the rollout of Instagram Stories.

This is undoubtedly worrying for Snapchat. By self-admission, Snapchat’s CEO Evan Spiegel had noted in Snap Inc.’s IPO filing: "If we do not develop successful new products or improve existing ones, our business will suffer.”

Could it possibly work out?

Despite the seemingly overwhelming negativity surrounding Snapchat’s future prospects, there is still a case that Snapchat’s future will be looking up. Despite its year-on-year losses, the revenue growth of Snapchat from FY 2015 to FY2016 was extremely impressive, rising a whopping 590%. It is also important to recognize that Snapchat has been built as a platform company. Its success depends largely on continuing to innovate ways to engage its customer base. Evan Spiegel seems to have larger plans for Snap Inc. than the current service offering of the Snapchat app. In line with branding Snap Inc. a ‘camera company’, Snapchat has been actively looking at expanding its offerings, having announced the launch of Spectacles, which are camera-equipped sunglasses, in September last year.

The company also has boldly stated its belief that: “In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones.” Many of us can still remember bygone platform applications, such as MSN messenger and Myspace. Certainly, many stockholders are putting their money on the fact that that under Evan Spiegel’s management, Snap Inc. will continue to evolve and stay relevant in line with companies such as Facebook, instead of experiencing a slow and painful demise.