Snap Has A Long Way To Go After Launching IPO

Snap, the operating company of the popular app Snapchat has launched IPO to become the first technology company to do so in 2017. Snap is relatively new in the market and it is extremely rare to find such a new company to begin selling stocks to the public. The public investors are generally interested only in companies with a handsome cash flow and good revenue growth. Snap has generated revenue only for the past two years and the company is far from being called as profitable. The popularity of Snap IPO shows that investors are willing to bet on a fast-growing unprofitable company.

Snapchat is an entertaining and communication app developed targeting the millennials. The fast disappearing photos and stories have attracted the attention from the young generation who are always interested in doing something quirky with their phones. The introduction of Instagram Stories has made it difficult for Snapchat to continue offering just what it offers now. However, this didn’t stop Snap from going public even though it was spending $1.14 for every dollar generated as revenue.

On Wednesday, when Snap shares were opened for the public, it was priced at $17 per share to generate $3.4 billion for the company. The demand for the Snap shares increased with Snap gaining 44% the next day and selling at $24 per share. Based on the outstanding shares available for the public, the capitalization revenue is capped at $28.4 billion, much greater than the expectation of $17.8 billion.

Even though Snapchat has advertising opportunities, the user base is elusive. Monetization is achieved through ads and third party contents. Snapchat Specs is a new hardware product released by the company with Snapcash payment system. The Snapchat app has 158 million daily active users, but the user base is not increasing rapidly.

Despite a huge growth in revenue, Snap continues to experience loss. By 2016, Snap increased its revenue from $58.7 million to $404.5 million. However, the net loss also increased to $514.6 million from $372.9 million. Before going public, Snap warned the investors that it may not be able to achieve profitability. Snapchat generated 98% of its revenue from advertising in 2016.

Snapchat is heavily used by users between the ages 18-34 and this demographic is highly coveted by the advertisers. Young adults are extremely active on Snapchat, but the user base is not growing fast. Snapchat has noted that the competition in fierce, mainly due to the development of similar features by competitors. The app is not popular in the developing countries that lack high bandwidth mobile networks.

Snap has made common A stocks available for the public and this means that investors have no voting power. The co-founders Evan Spiegel and Robert Murphy have 10 votes per share and they have complete control over the development of the company. It is a very brave move for a technology company to become public, without making profits and offering shares with no voting power. Investors have to wait and watch if these shares would bring in the much-desired return on their investment.

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All these social media companies are going to crash and burn when the next big thing pops up.

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