Snapchat IPO: A Cautionary Tale

snapchat-ipo_exchanges

By: Courtney Gilmore,

 

The much-anticipated public offering has finally been filed as of February 2.[1] Snapchat, formally known as Snap Inc., has officially requested a spot on the New York Stock Exchange under the ticker symbol SNAP.[2] The company took advantage of the JOBS Act (Jumpstart Our Business Startups), which allows companies with less than $1 billion of annual revenue to file for IPOs in secret.[3] The friendly ghost will likely go public in March of this year.[4]

While this is an exciting new endeavor for the everyday social media guru, it may be better suited for the high-risk tolerance investors only. Proceed with caution.

Facebook and Twitter aside, Snapchat boasts itself as a camera company, “giving people the power to express themselves and live in the moment.”[5] On the other hand, “Facebook says its mission is connecting everyone, while Google’s is to organize the world’s information.”[6]

Sure, this sounds like an attractive label for any millennial or investor out there, but beyond this, there is not much out there to lay a stable foundation for Snapchat’s future. For instance, Snapchat has an extremely short financial history.[7] Moreover, the company is labeled as secretive by outsiders and employees alike.[8] Evan Spiegel, Snapchat’s Chief Executive Officer, said in a 2015 note to employees, “‘[k]eeping secrets gives you space to change your mind, until you’re really sure that you’re right.’”[9] So, if Snapchat is unable to be transparent with even its own employees, how will prospective investors be able to keep track of their investments?

Snapchat’s founders are seemingly resistant to give up any control whatsoever. While this is a natural instinct for any sensible businessman or woman, Snapchat’s founders Evan Spiegel and Bobby Murphy, maintain that the shares issued to the public will carry no votes.[10] There are three classes of stock in Snapchat: Class A, Class B, and Class C. Only Spiegel and Murphy will control Class C shares, whereby each share receives 10 votes.[11] Class B shares receive one vote per share and are issued to venture capitalists and those investors that have poured capital into the company before its initial public offering.[12] Finally, the Class A shares will be issued to the public.[13] In addition to no vote shares, Snapchat reportedly has no intention of paying out cash dividends to its investors.[14] Without much control, investors must turn to other factors to weigh their risks and rewards.

In 2016, Snapchat recorded revenue of $404.5 million, but losses amounted to $514.6 million.[15] Although its revenue increased by 600% between 2015 and 2016, Snapchat’s current losses exceed Twitter’s at the time of its own IPO, while Facebook had revenue of $3.7 billion at the same point in its life cycle.[16] This begs the question of whether Snapchat will suffer the same fate that Twitter did when it went public. “‘To me, Snap is Twitter 2.0 – a company with a good growth rate that is losing a ton of cash, coupled w/ a massive valuation.’”[17] Snapchat is seeking a $25 billion valuation, which is sixty-two times its revenue.[18] On the other hand, GoPro, comparable to Snapchat’s “camera company” self-description, trades at one times GoPro sales.[19] Twitter trades at five times its revenue, and Facebook trades at fourteen times its revenue.[20]

Another important factor for investors to consider is the slowing in growth that Snapchat has experienced more recently.[21] Since Facebook’s attempt at similar products to Snapchat’s Stories, Snapchat views have allegedly declined between fifteen and forty percent since August.[22] Instagram’s version of Stories can also be attributed to Snapchat’s recent decline in user status.[23] Of Snapchat’s 158 million users, the majority consists of subscribers ranging between the ages of 18 and 34 years old.[24]

Hosting costs are another concern. Snapchat just signed a deal with Google to host Snapchat’s cloud space for $400 million per year.[25] On the surface this doesn’t seem like anything to get hung up on, except that Snapchat’s revenue last year was just about $400 million.[26] Snapchat’s hosting costs are so large because of the many video features Snapchat offers to consumers.[27] Expenses are also growing by employees.[28] Snapchat has tripled its number of employees to total 1,859 in 2016.[29]

On the upside, Snapchat is in the market of offering new, innovative products (like any logical tech company would). For example, Snapchat added its geofilter options in July 2014.[30] The company went on to release the Spectacles in September 2016.[31] Snapchat’s “foray into hardware and its new identity as a ‘camera company’ could cause investors to value it differently than a pure-play company, where profit margins are typically higher.”[32] Snapchat is also expected to bring in close to $1 billion in revenue by the end of this year.[33]

Moral of the story: while the risks are high, the rewards will likely be higher. Snapchat’s video features certainly distinguish the company from its competitors, as do Snapchat’s endeavors with the Spectacles and more products to hit the market. While the company may be secretive, experiencing minimal user decline, and racking up steep payment obligations, there is still a plethora of innovation to look forward to, and Snapchat remains at the cutting edge of it all. Perhaps Snapchat will not offer stock suitable for the novice investor’s portfolio, but it certainly has the potential to evince high reward for those that are even able to buy in initially. This young company has plenty of room to grow and plenty of buzz to live up to.

 

 

 

[1] See Barbara Ortutay, Snap, Maker of the Teen Social App Snapchat, Files for IPO, The Washington Post (Feb. 2, 2017), https://www.washingtonpost.com/national/snap-maker-of-the-teen-social-app-snapchat-files-for-ipo/2017/02/02/794c3b92-e9a4-11e6-903d-9b11ed7d8d2a_story.html?utm_term=.54565215b4ae.

[2] See id.

[3] See Seth Fiegerman & Matt Egan, Snapchat Files for $3 Billion IPO, CNN (Feb. 2, 2017), http://money.cnn.com/2017/02/02/technology/snapchat-ipo-filing/.

[4] See id.

[5] Sarah Frier & Alex Barinka, Can Snapchat’s Culture of Secrecy Survive an IPO?, Bloomberg (Jan. 17, 2017), https://www.bloomberg.com/news/features/2017-01-17/can-snapchat-s-culture-of-secrecy-survive-an-ipo.

[6] Id.

[7] See id.

[8] See id.

[9] See id.

[10] See Tom Zanki, 4 Takeaways From Snap’s IPO Filing, Law360 (Feb. 3, 2017), https://www.law360.com/technology/articles/888278/4-takeaways-from-snap-s-ipo-filing?nl_pk=a6f0df19-c127-4444-8e8b-a4c34dfadf0b&utm_source=newsletter&utm_medium=email&utm_campaign=technology.

[11] See Fiegerman & Egan, supra note 3.

[12] See id.

[13] See id.

[14] See Jen Wieczner, Here How Insanely Expensive Snap’s IPO Will Be, Fortune (Feb. 2, 2017), http://fortune.com/2017/02/02/snapchat-ipo-snap-stock/.

[15] See Victoria Woollaston, How Snapchat Turned Dick Pics into a Potentially Multi-Billion Dollar IPO, Wired (Feb. 3, 2017), http://www.wired.co.uk/article/snapchat-ipo-cameras.

[16] See Wieczner, supra note 13; Maya Kosoff, Will the Snapchat I.P.O. Be a Flop?, Vanity Fair (Feb. 2, 2017), http://www.vanityfair.com/news/2017/02/will-the-snapchat-ipo-be-a-flop.

[17] See Fiegerman & Egan, supra note 3.

[18] See Wieczner, supra note 14.

[19] See id.

[20] See Eric Jackson, 4 Reasons to Be Wary of the Snapchat IPO, Forbes (Feb. 7, 2017), http://www.forbes.com/sites/ericjackson/2017/02/07/4-reasons-to-be-wary-of-the-snapchat-ipo/#2abf5745339b.

[21] See Kosoff, supra note 16.

[22] See id.

[23] See Vikram Nagarkar, Snapchat IPO: The Pros and Cons of Buying Into Snap Stock Right Now, amigobulls (Feb. 6, 2017), http://amigobulls.com/articles/snapchat-ipo-the-pros-and-cons-of-buying-into-snap-stock-right-now.

[24] See Woollaston, supra note 15.

[25] See Jackson, supra note 20.

[26] See id.

[27] See id.

[28] See Wieczner, supra note 14.

[29] See id.

[30] See Woollaston, supra note 15.

[31] See id.

[32] Portia Crowe, Snap Files for its IPO, Revealing Surging Sales Growth and Huge Losses, Business Insider (Feb. 2, 2017), http://www.businessinsider.com/snap-to-list-on-nyse-report-2017-1.

[33] See Nagarkar, supra note 23.

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