Snapchat IPO: Sure to entertain

Welcome, my first post on the interwebs. I figured I would write about the Snapchat IPO since that seems to be the topic of the week. I’ve also used the app for a couple of years now so I may be able to offer a perspective unlike some of the other reporting I’ve seen on it.

IPO valuation

The company is expected to list 200 million shares at $14-$16/share putting it in the ~$20B valuation ballpark. Early reports indicate it is possibly 3x oversubscribed, so we could see an IPO day price increase, and with the way this market has been pumping lately, why not?

Sales growth

Snapchat is coming in at roughly $400M in 2016 sales, with 2017 at the high end to be $1B, putting it ~20x this years sales. As a user I am really impressed with the amount of improvements Snapchat has rolled out in the past year. Sponsored filters, geo-tags, and ads have all greatly increased in frequency in the past year to help Snap bring in revenue, as we saw with a 500% revenue increase this year. But I am skeptical they are able to monetize current users much more within its current product offerings. So in order to keep revenue growth high, they will need to become more ad driven, which has risks, or greatly expand their user base beyond the current age group, which will be a whole new challenge. I’m also not a buyer of Snaps story that old androids are hurting them, and that is an area for future growth. Power users they can really monetize are more than likely not using a 3–4 year old android phone.

Snapchat sponsored filter & city Geotag

Instagram steals some thunder

“Stories” are a major part of what Snapchat used to start generating ad revenue. They are a compilation of the last 24 hours of clips a user has shared to the public. Snapchat has begun placing ads in between these stories, allowing it to be less intrusive than say slipping an ad in between personal pictures and videos. The problem is Instagram (owned by FB) recently rolled out something very similar, and from the popular users I follow on both platforms, it appears to be a major hit. Even worse is I’ve seen multiple Snapchat users post on their stories to “head to Instagram” to check out new posts. This has definitely hurt Snapchat, and has pissed off Spiegel & crew with his girlfriend recently calling out Facebook for “stealing his ideas” in a public interview.

A camera company?

When Snapchat released its IPO prospectus, one of the things that caught my eye was calling Snapchat a “camera” company. That tells me spectacles may just be in the beginning stages of what the company has planned. I’ve also seen smartphone rumors, but that would be real capital intensive so probably isn’t worth putting in the picture today. I don’t think Snapchat should spend too much time in the hardware game, just look at how “being more than a camera company” went for GoPro:

GoPro Performance since IPO

A media company?

One part of Snapchat that I think gets under looked is the “Discover” section of Snapchat. This is where media companies compile articles and info into small slideshows that you click through. These can include text, audio, pictures, video and graphics all in one, which makes for a quick and pleasant learning experience. Here is an example of a short one from The Washington Post regarding new speeding laws:

Washington Post “Discovery” Article

Now here it the version of the article on the Washington Post Website:

Just paragraphs on paragraphs of black text on a white background, which is even worse to view on mobile. With mobile being the future, it will only be a matter of time before these media execs will realize they need to change the way their info is consumed. If Spiegel can expand here and provide accurate curated content for users, it could be a big part of the app.

Conclusion:

Snapchat offers a unique asset with the ever elusive millennial and gen Z class that will certainly be coveted. But the company is moving too fast and is too unpredictable to get the sky high valuations it is going for. Snapchat probably doesn’t have any idea where it will be in 3–5 years, so it’s truly a tech spec play as it gets. A large part of the investment is on Spiegel himself, and his ability to continue to grow in this space. I personally don’t think the IPO will go much differently than a lot of the tech IPOs have, and expect it to be just another statistic:

From Reuters: “ Eight of the 10 biggest technology IPOs fell by 25 percent and 71 percent in their first 12 months on the public market, according to a Reuters analysis on the market performance

Disclosure: Not investment advice. No positions in the companies mentioned above.