The Snap IPO is finally coming in March, and investors are unsure about what to think. Snap formally filed with the SEC on Thursday, and their ambitions are as big as everyone predicted.
Snap aims to raise $3 billion and hopes to see the company valued from $20 to $25 billion. This would make it bigger than Facebook (NASDAQ:FB) or Google (NASDAQ:GOOGL) at the time that each IPOd, and quite a few investors are scoffing at the idea that Snap and Snapchat could be worth that much. Some have compared Snapchat to Twitter (NYSE:TWTR), which has continually lost value since its 2013 IPO.
I do not think Snap will be the next Twitter as Snap has shown a constant willingness to innovate and try new things. But there are some serious and problematic issues with this company, and the current nature of the tech IPO market could mean that Snap could quickly become overvalued in the initial trading frenzy.
What does Snap want to be?
Investors and tech analysts talk about Snap as a social media company which competes with Facebook and Twitter. But Snap called itself a camera company in its filing and states:
“We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate.”
Why did Snap do this? Some analysts are speculating that this refers to Snap’s ambitious plans to expand distribution and inventory of its successful Snap Spectacles and its forays into augmented reality. On the one hand, this is concerning. While the Snap Spectacles are interesting and have sold well, they do not actually make money for Snap at the current price. Snap has indicated this won't change even as the company spends more money to improve them.
On the other hand however, this is a big reason why I am convinced that Snap—at the very minimum—will not end up like Twitter. One of Twitter’s major problems has been that they've sat on their hands since going public four years ago. Twitter today is pretty much the same company, and product, it was in 2013, and you are not going to attract new users by doing the same old thing.
Snap is not afraid of innovation and bucking trends. Snapchat itself, with its temporary pictures represented a change from how other social media companies were obsessed with documenting everything, and Snap did not hesitate to release its Spectacles even while other companies may have been turned off by the Google Glass disaster. And as mentioned above, Snap is also pushing forward into augmented reality. Snap is highly innovative and has good marketing sense as the Spectacles show, which are good signs for the company.
Making a Profit
But while Snap’s willingness to adapt and innovate is fantastic, investors want to see cash. And here we run into the reason why people keep comparing Snap to Twitter. Twitter is in trouble because it has not managed to become profitable before its user growth leveled off, and there are legitimate concerns that Snap could face the same problem.
Becoming profitable will be hard when you realize Snap is losing. Snap had a net loss of about $515 million in 2016 and $373 million in 2015, in comparison to revenues of $404 million and $58 million respectively. The jump in revenue is good, especially if you consider that the increase has come from Snap finally allowing advertising in late 2016.
But there are some problems with that. One reason for Snap’s appeal is that it has become highly popular with the coveted teens and millennials demographic. But if Snap ratchets up the advertising pressure in order to make a profit, will those users stay? Snap listed Facebook and Instagram as among its biggest threats, and the younger generation could flee towards other messaging apps. Combine that with the fact that Snap does not appear to be interested in becoming a true social media giant like Facebook, and it is challenging to see how it can get on the road to profitability.
Stay Away, but Don’t Ignore
While IPOs are supposedly a means for investors to get in on the ground floor, the Snap IPO is going to be bumpy in the short term and investors should thus stay away initially. Do not forget that the Snap IPO is viewed as a bellwether for a tech IPO market which has been dry for the past few years. I would thus not be surprised if investors enthusiastic about such a large tech company quickly drove up the price, only for it to fall once the hype wears off.
Snap’s financials are concerning, and investors should remain cautious. But it is an innovative company which has been able to release popular products in ways people have not anticipated, and that is a valuable thing for a tech company. When Snap’s value falls, as it should, it could make a good long-term investment. Don’t jump into this IPO immediately. Wait for it to fall, and then consider picking it up and holding on to it.