The Snap IPO: Is This the Next Social Media Titan?

by Samuel Taube, Managing Editor, Investment U
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Snap Inc. (NYSE: SNAP), the parent company of social media app Snapchat, went public last week. The much-anticipated Snap IPO was a positive note on an otherwise gloomy day in the stock market.

Most major indexes declined on the news of IRS raids at Caterpillar (NYSE: CAT) offices. But Snap stock shot up by almost 50% from its initial price, rising from $17 to $25 in a matter of hours. It quickly fell back toward $20 in subsequent days… but more on that in a moment.

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By the numbers, the Snap IPO was a resounding success. But that doesn’t necessarily guarantee that Snap is on the way to becoming the next social media titan. Let’s look at everything that went right - and wrong - in this historic launch.

What Went Right in the Snap IPO

When’s the last time you heard about a 44% one-day gain? (Penny stocks don’t count.)

The IPO accounted for about 10% of the total trading volume of the NYSE on March 2. With a market cap of more than $20 billion, Snap is now twice the size of Twitter (NYSE: TWTR). To put it in less technical terms, they made a boatload of money.

The Snap IPO had plenty of hype, to be sure. But it wasn’t just hype fueling last week’s rally. Growth and popularity also played big roles.

Snapchat broke 150 million daily active users last year. Despite a recent slowdown in its user growth, the company has managed to gain a few million eyeballs every quarter since 2014.

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The company isn’t profitable yet (more on that in a moment), but it has seen revenue grow at a similar pace to daily active users. And perhaps more importantly, it is cutting costs in an innovative way.

Many tech companies are dropping billions on grandiose corporate headquarters. Facebook (Nasdaq: FB) and Apple (Nasdaq: AAPL) are two of the latest companies to develop this expensive “edifice complex.”

Snap, by contrast, doesn’t have a huge campus and doesn’t want one. It’s renovated a few buildings in its native Venice Beach, but it’s not demolishing entire city blocks to build a spaceship-like HQ.

What Could Still Go Wrong for Snap

Unfortunately, Snap’s presence in Venice Beach is still causing a stink with the locals. Gentrification has become a big concern for middle- and working-class Californians. Many natives are concerned that the expanding presence of a  multi-billion-dollar company could eventually price them out of their own neighborhoods.

As a result, Snap faced all-day protests at home during its IPO. Locals marched throughout the city with signs reading “Snap Killed the Mom n’ Pop.” That’s a reference to the many small businesses which have been pushed out of Venice Beach by Snap’s renovations.

What’s more, the social media unicorn’s financials aren’t all rosy… and that’s part of the reason why Snap shares have fallen by double digits since their bright IPO. The company isn’t just unprofitable… it’s burning money. Snap posted a loss of over half a billion dollars in 2016. And while its user base still grew that year, the pace of growth slowed dramatically.

That may have something to do with rival photo-sharing service Instagram, a subsidiary of Facebook (Nasdaq: FB). Instagram has copied many of Snapchat’s most popular features, such as Stories (a sort of public video diary).

Since the IPO, some commentators have expressed concerns that competition from the likes of Instagram has contributed to Snapchat’s slowing user growth. Those concerns have put downward pressure on the stock in recent days.  

More broadly, analysts aren’t convinced that Snap can right the ship fast enough to justify its valuation. There isn’t a single analyst who rates the stock a “Buy.” And there are at least two with outright “Sell” ratings on the stock. Some analysts are setting  year-end price targets as low as $10 for SNAP. That’s well below the $17 IPO price and the $24 market-opening price.

The Snap IPO definitely made lots of money for the company and its founders. And Snapchat is certainly a popular app, especially with teens - a highly desirable demographic for advertisers. But the company is still a long way from becoming the next Facebook. Only time will tell if last week’s IPO was really the birth of a new social media superpower.

And if Facebook stock is any guide, investors don’t need to be in any rush to get in on the SNAP speculation. The stock is a juggernaut now, but Facebook fell more than 50% after its much-hyped IPO in 2012. Investors would be wise to give Snap shares a similar chance to shake out.

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