A New Page to the Snap Story

April 20, 2017
Editor(s): Dominic Fischer
Writer(s): Max Ruan, Oskar Dobrowolski, Tharaka Segar

This year Snap Inc. the developer of Snapchat had its Initial Public Offering (IPO) causing investors to fixate on the valuation of the social media company. An IPO refers to the stock market launch of a company, releasing shares to be purchased by prospective investors in the general public for the first time. Snapchat is an image messaging and multimedia application created by former Stanford University Students Evan Spiegel, Bobby Murphy and Reggie Brown. Originally named ‘Picaboo’ at its 2011 launch, the companies name developed into Snapchat Inc., later renamed Snap Inc. in September 2016 (Escher, Crook, 2015). This coincided with the introduction of the company’s first pair of smart glasses, “Spectacles” with a built-in camera. These went on the market on February 20th 2017. Over the past six years, Snapchat has evolved from a university project to a mixture of private messaging and public content, displaying brand publications and live events. The company boomed during 2012 and is now reported to have 166 million daily users. Presently more than 2.5 billion snaps are sent each day, with users visiting the app approximately 18 times a day (Murphy, 2017).

Applications such as Uber and Airbnb continue to grow and Snap Inc.’s decision to become a public company is likely to initiate a trend. However, investors are wrestling with the idea of buying into such companies, battling the prospects of high valuation versus profit. Despite having such a high value, Snapchat cannot compete with Facebook’s $390 billion worth (Levy and Crowe, 2017). Snapchat officials have even admitted that their “competitors may also develop products, features, or services that are similar to ours or that achieve greater market acceptance.” Furthermore, with its slowest growth quarter of any of the 12 quarters reported, its plateau has aroused concerns on Snapchat’s niche demographic and management teams to successfully advertise (Levy and Crowe, 2017). Snapchat is only focusing on monetising through advertising, zoning in on the question for investors, will Snapchat be able to achieve sustained profit?

Snap Inc. Valuation

On March 2nd 2017, the image messaging application hit the New York Stock Exchange, expecting to have a reported value of 25 billion USD (Tepper, 2017). Snap is one of the first of the next generation applications to join Wall Street, already with a higher valuation than established companies such as Twitter and United Continental. After losing $514 million in 2016, an increased 38% from 2015’s $372 million loss, Snap is hoping to raise a $3 billion revenue from its Initial Public Offering (IPO) (Murphy, 2017).

The IPO started at $17 a share, but by the end of the trading day, the stock rose by 40% to $24 a share, the company being worth $28.3 billion (Stewart, 2017). This appears strange given their lack of profitability since the very beginning. They have lost money every year since even the start of commercial operations back in 2011. In terms of hard statistics, they had lost $US514.6 million in 2016 and lost $372.9 million in 2015 (Stewart, 2017). Compared to other large tech IPOs Facebook, Twitter, Alibaba and LinkedIn its original share price was the lowest although Snap Inc. has followed the others’ trend of a gain on opening day (CNBC, 2017).

In order to justify its high valuation we need to look further into the business. The biggest strength investors see in Snap is their growth and their plan to monetise off their very large user base (Ben Eisen, 2017). Snapchat is one of the most successful and used social media applications today. It appeals very much towards the younger 18-24 population. Their strength lies on how the app retains and engages users whilst implementing high rates of advertising.

Snapchat has three main features for revenue generation through advertising. ‘Geofilters’ whereby companies can sponsor and create a frame for photos taken using the app in a certain location. ‘Discover’ which offers a range of channels of short-form content from many major publishers, like Buzzfeed, CNN, etc. Finally ‘Stories’ where users can create a chronological-based collection of their photos and videos to their group of friends more publicly. Companies can buy an advertisement within ‘Stories’ often promoting a sponsored live event through said pictures. There is a wide scope in terms of what types of businesses advertise, from Buzzfeed a media company to individual promotions for upcoming movies.

Tracking post-IPO

Since the 2nd March 2017, when Snapchat started trading on the New York Stock Exchange the share price raised significantly on the second day of trading to value the company at over $34b (Finance.yahoo.com, 2017), however since then the share price falls daily. To get the full picture, it is important to note that the amount is equivalent to that of American Airlines or Kellogg, the cereal manufacturer (Gould and Oyedele, 2017).  Most people ask the question whether Snap Inc. is going to follow Facebook or Twitter’s path. Facebook following a short period of a decline, showed a perfect growth path, situating its current share price at over three times the 2012 IPO level. On the other hand, Twitter peaked in the first year following the IPO and has since lost value.

There is a lot of scepticism when it comes to Snap’s future (Business Insider, 2017). The company has to compete for advertising sponsors against such giants as Facebook and Google. What is more, Facebook’s Instagram launched Snapchat like features that gain popularity. According to Nick Griffin, partner at Munro Partners – growth equity hedge fund, we should evaluate Snapchat on the basis of active user number. There is a phenomenon of network effect in the social media market. Putting it simply, the company must achieve a threshold of active users to be valuable and the value is derived from the number of users (Shapiro and Varian, 1999). For Snap the threshold is estimated to be around 250 million, compared to 158 million active users now, with growth is diminishing from 17% in Q1 2016 to 3.3% in Q4 2016 (Recode, 2017).

Future Outlook

Looking at the company’s IPO prospectus we can see that they see themselves as a camera company. This statement is significant because although we know them for the disappearing pictures app, they position themselves as a hardware manufacturer. In November 2016, the company launched special camera-glasses called the Spectacles. They look similarly to the Ray Ban sunglasses that we know well, but they have a camera installed that allows to capture moments from the head’s perspective (PCMAG, 2017). It looks like a move to diversify revenues and profit from the wearables market that is gaining popularity. They are not pioneers in the market however as their product is comparable to the GoPro action camera that is already popular.

Snap Inc.’s initial public offering was one of the biggest and most keenly observed in the modern tech sector. Although popular among young people, the company was met with scepticism from investors, which is illustrated in the share price chart. Competition for advertising with the giant established players of their field will determine their long term financial success. What is more, the real value of Snapchat lies in the network it creates despite user growth currently diminishing. Finally, Snap Inc. is looking for new markets to diversify revenues via the introduction of products like the Spectacles.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.