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Will the Snapchat I.P.O be a flop?

By Maya Kosoff, February 3, 2017

The long-anticipated initial public offering for Snapchat, the millennial-focused messaging app, is finally here, but investors don’t appear to be buying the hype. For years, venture capitalists have looked forward to seeing a return on the buzzy, Los Angeles-based company, which 26-year-old co-founder Evan Spiegel launched in his living room in 2011. Since then, the disappearing photo-and-video app has grown into a social-media colossus, turning down a $3 billion buyout offer from Facebook in 2013 and surpassing Twitter’s daily usage in 2016. An eventual public offering had been seen both as an inevitability and a bellwether for the tech industry, whose I.P.O. pipeline stalled in 2014 and has been chilly since.

As a private company, outside investors have been eager to see whether Snapchat might become the next Facebook or, more troubling, the next Twitter. Facebook, which went public at an eye-popping $104 billion, was already profitable when it added its ticker symbol to the NASDAQ in 2012, and has more than tripled in value since. The market hysteria was somewhat more muted when Twitter threw its own hat into the ring a year later, raising $1.8 billion at a nearly $25 billion valuation: the social-media company has since seen its market capitalization cut in half amid continuing questions about its inability to grow its user base or achieve profitability.

A closer look at Snap’s financials, revealed for the first time when it filed its I.P.O. prospectus Thursday, shows investors may have reason to worry that Snap’s future might look more like Twitter's than Facebook's. Snap, which is not profitable, lost $514 million in 2016 on revenues of more than $400 million in annual sales, compared with a loss of $373 million on $58.6 million in revenue the year before. While that means Snap is growing quickly and could soon reach profitability, its current losses exceed Twitter’s at the time of its own I.P.O. (Facebook had revenue of $3.7 billion at the same point in its life cycle).

As Bloomberg’s Leonid Bershidsky notes, Snapchat’s cost of revenue is also comparatively expensive. While Facebook spent about $0.14 per $1 of revenue in 2016, or $2 per monthly active user, Snapchat’s cost was $1.11 per $1 of revenue, or $3 per user. In its prospectus, Snap concedes, “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

Analysts seem to think there’s limited upside for investing in Snap in the short term. “To me, Snap is Twitter 2.0—a company with a strong growth rate that is losing a ton of cash, coupled with a massive valuation,” Brian Hamilton, the chairman and co-founder of financial analysis company Sageworks told me. “If the estimates on valuation are in the ballpark, early investors in the I.P.O. are going to be subject to tremendous downside risk.”
Snap has been careful to avoid social media comparisons to Facebook and Twitter. Instead, it branded itself as a “camera company” in September, when it announced the debut of its first hardware product. Rather than limiting itself as a messaging service, Snap wants to show that it owns a portfolio of products, though right now the only two publicly released products it has are its Spectacles hardware product and its messaging app. Still, parallels between the three largest social-media companies in the U.S. are inevitable. In conversations with investors, Snap has pitched itself as a content powerhouse like Facebook, The Wall Street Journal reported, rather than a content platform like Twitter. The question for investors now, as Snapchat prepares to begin selling shares in March, is whether the five-year-old upstart should be compared to either.

For the full story featuring Sageworks, visit Vanity Fair – Will the Snapchat I.P.O. be a flop?