A ghost in the Street?

Today, is Tech day. Snapchat’s parent company will be trading today in the New York Stock Exchange with a price tag of $17.0 per share for a total valuation of $24 billion. It is the most awaited and the largest IPO since Alibaba started trading in 2014 with a valuation of $168bn. American capital markets have not seen many tech companies going public despite the growing number of unicorns in the tech sector. Investor will look at this IPO also to evaluate  the health of the Tech IPO market. Many start-ups prefer to stay private where they can benefit astronomic valuation as emerged in the latest financing rounds of Uber or Airbnb. Investors are thirsty of new tech stocks and Snapchat valuation seems to support the view. Some concerns remain, such as the profitability profile of the company and growth prospects or the scalability of Snapchat customer base.

Snapchat is the first of the 154 unicorns. Will it be a success story like Facebook or will it fade waway as fast as its instant messages? This is a million-dollar question that nobody can answer as of now. The only thing an investor can do is to look at the numbers. Compared to its peers Facebook and Twitter, at the moment of the IPO, the perception is that Snapchat lags the competition.

In terms of profits, Snapchat reported a net loss of $515m in the last reporting year before the IPO, compared to the $1.0bn generated by Facebook. In terms of Revenue Facebook was already generating more than $3.5bn justifying the higher price tag, and even if Snapchat is better positioned than Twitter at the moment of its offering is still not clear how Evan Spiegel, Snapchat co-founder intends to scale and increase its customer base which is the diriment factor in the Tech landscape.


Twitter stock has been hammered recently for discouraging data in terms of active user growth, despite improving financial performances, while Facebook has been the trendsetter both in terms of user growth and financial metrics. As of now, Snapchat is above Twitter but behind Facebook in terms of user base.


In terms of valuation, Facebook topped $100bn. The company was founded 8 years before, and it managed  to scale the customer base very quickly, transitioning from a tiny social network reserved to Ivy  League students, to the widest social media company in terms of active users. Its valuation reflected the higher premium paid for its wider base of users. Investors were willing to pay more to have their hands on this omnicomprehensive social network that from its IPO almost tripled the number of users. Snapchat is  more like Twitter, in term of multiple EV/users. The type of service provided is more  niche than Facebook, therefore its potential scalablity is less visible as of now.


Since the IPO, Facebook and Twitter had opposite faiths. Facebook investors at the beginning were reluctant. Upset by the lack of visibility of Zuckerberg strategy and the high valuation, they dumped the shares until August 2013. After losing more than 50% of its initial value, Facebook founder was able to restore confidence in the market improving user and revenue growth, diversifying its business model through key acquisition such as WhatsApp for the huge sum of $19bn and Instagram. On the other hand, Twitter reported strong performances in the very next days and weeks after its IPO, but then started to plummet on concerns regarding Monthly Active Users numbers. Since the IPO, Twitter share lost almost 70% of the initial value raising rumours of possible take-over by larger players.


The competition is getting stronger and tougher for Snapchat. One of the key elements of its success story were the possibility to create the so-called Stories, within the instant messaging tools provided by Snap. Those stories were videos 10s long with a 24h lifecycle. Recently, Instagram replicated the format. The number of users that uploaded their stories through Instagram rose 150M per day, approximately the amount of Snapchat total users. In 2017, Facebook and WhatsApp did the same, in the effort of riding this new trend in mobile messaging.

Will Snapchat be able to cope with the increased competition in the social media landscape largely dominated by Facebook and its group of companies? Everything will depend on the strategy Evan Spiegel intends to implement in order to make the company profitable and increase the customer base on a long-term basis.


Tancredi Viale


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