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Snapchat IPO: Opportunity for Disaster

There is still much yet to be known about the upcoming Snapchat IPO. The one undisputed number that is coming from the media is the valuation, rumored to be between $20 and $25 billion. Snapchat like many of its tech predecessors rely almost solely on advertisements for revenue. Snapchat’s 140 million daily active users is certainly no small feat and their revenue growth from $60 million in 2015 to $250-$300 million in 2016, with estimates of $1 billion in revenue in 2017 can not just be brushed aside. However, there is no question that at the top end of the valuation ($25 billion), investors would be paying a premium for revenue growth. In the current market where large growth stories seem to be harder and harder to come by, it would not be surprising if investors are willing to pay 25 times forward revenue to get a piece of the IPO that has been so highly lauded by the financial media.

Looking at the historic revenue growth makes an enticing argument to pay the premium, but how sustainable can this type of growth be? We have been warned of this type of company through previous IPO’s. Case in point, Twitter. A promising social app with growing user-base comes to market with advertising as its main source of revenue. The company goes public at a premium valuation and then tries to figure out how to further monetize their promising user-base. Extremely high investor expectations met reality as they began to realize they could not monetize beyond advertisements and user growth began to trail off.

I believe the same fate will be met by Snapchat. Investors are looking for the next Facebook in every social company that comes to market, however these two companies are not analogous. Facebook’s platform easily accommodated extremely effective monetization of the user because of the broad scope of the website. Snapchat has a more niche user base, less specific information to properly target ads to users, and less incentive to spend long periods of time on the app.


Overall, the nature of the app itself limits it’s own growth prospects. The important point about revenue growth is that past performance is not indicative of the future potential. While some companies can maintain such numbers, Snapchat is approaching the limit for their niche app. As Snapchat’s user base, much like Twitter’s, begins to reach its carrying capacity, investors will see that the growth numbers they paid a premium for cannot be attained.

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