One of the most closely-followed tech companies in recent years has been Snap Inc., maker of popular content-sharing platform Snapchat. Like so many other companies before, Snap is about to go public, and hold an IPO early in March. Snap will be available to eToro traders from the first day of trading after the IPO – so here’s a few things to consider before investing in it.
The history of Snap
Founded in 2011 as Snapchat, the ephemeral messaging company quickly took the world by storm, reaching millions of users worldwide. Over the years, the company added many other features, and became a “microvloggin” platform, enabling users to post daily recaps called “stories,” on top of it being a message service. Snap’s flagship product remains Snapchat, which has 158 million daily active users, who create a whopping 2.5 billion pieces of content every day.
Snap does have a steady revenue stream. It brought in $405 million last year, which is nearly seven-times higher than its proceeds in 2015. However, it is important to note the company is still losing overall. Snap ended last year with overall losses of $514 million. The company is spending increasing amounts on R&D, and expansion, with its employee roster growing by 210% last year.
Investing in Snap’s IPO: What to consider
When opting to invest in a company as soon as it goes public, there are a few factors that are worth considering. Here are a few points that are relevant to Snap in particular:
- Is the company making money? In Snap’s case, it is. However, as mentioned before, it is still a long way from being profitable. Companies usually use IPOs as a means of generating quick revenue – but Snap will obviously not “sit” on the money, and use the cash influx to expand its services further. Moreover, the company has said that it may never achieve profitability, so it’s safe to assume that it will continue spending money on expansion and new products.
- What portion of the company is being offered? Sometimes, IPOs are used as an “exit” strategy for its earlier investors, looking for a way to cash-in on their investment. A good indicator of this strategy being used is when an exceptionally large portion of the company is being offered. At the time of the IPO, Snap would have a valuation between $19.5 billion and $22.2 billion, while trying to raise up to $3.2 billion, so it isn’t offering-up such a large chunk to the public, meaning you could rule out the “exit” strategy option.
- Share prices often fall post-IPO: Twitter is a good example, since it also went public with a negative profit/loss balance. After skyrocketing nearly 73% on the day of its IPO, Twitter shares went below its IPO price less than two years after. Snap has generated lower proceeds and showed bigger losses than Twitter did at the time of its IPO, so this is a point to consider.
- Who is the underwriter? When it comes to IPOs, it is important to have a well-known financial institution serving as an underwriter. In Snaps’ case, they have an impressive seal of approval, with powerhouses Morgan Stanley and Goldman Sachs underwriting the deal.
- An IPO is a recipe for volatility: It is rare when a company’s IPO share price remains stable, and it usually shifts, for a better or worse. Price fluctuations could happen as early as moments after the IPO, and could drastically change over longer periods of time. For example, when Facebook went public in 2012, its share price was $38. Today, it is over $130 – so there is a long-term strategy to be considered as well.
- Snap depends on Google: Snapchat’s infrastructure is built on Google’s cloud services, and Snap has committed to spend the hefty sum of $2 billion on Google services over the next five years. This commitment could prove to be a heavy burden on Snap’s profit margins.
The bottom line: Should you invest in Snap?
Snap’s IPO is often measured within the spectrum of Facebook’s success and Twitter’s failure. While Snap hopes to be the next Facebook, some of the signs, such as the fact that it is far from being profitable, indicate that it might be more like Twitter. Additionally, Snap is in direct competition with Facebook, or more accurately, with Instagram “Stories”, which rival Snapchat’s main feature, and are reportedly taking a big bite of Snap’s business. It is important to remember that Facebook once made a bid to acquire Snap for $3 billion, which was turned down, so it’s obvious Facebook is very interested in competing with Snap.
However, Snap has recently declared itself “a camera company” and said that it is reinventing the concept of the camera. While this relates to Snap’s current activities, is could also mean it is working on new developments and innovative features, to be introduced in coming years, which might separate it from its direct competitors. Either way, whether it will be a Facebook-like success story or a Twitter-esque flop – the Snap IPO presents many interesting opportunities for traders.