Take a Pass on Snapchat

Getting in on the ground floor can be incredibly profitable. So profitable in fact that we’ve started covering companies in Breakthrough Tech Profits that are raising funds from investors before they’ve even filed the paperwork for an IPO. But there can be pitfalls to early stage investing, so you must be sure about your due diligence before you invest a single dime. In this case, I’m thinking about the upcoming Snap (anticipated ticker SNAP) IPO.

Snap is the owner of Snapchat, the popular photo and video sharing platform that has morphed into something of a content company, and its IPO is highly coveted. Depending on who you ask and what measurements they’re using, its anticipated $25 billion market cap makes it either the most expensive or second most expensive tech IPO in history. The platform sees a lot of activity with 158 million average daily users, who create roughly 2.5 billion “snaps” each day.

The real attraction is its demographics; it’s wildly popular with 18 to 24 year olds, who spend hours on the service. Users in that age range come to site 20 times a month, spending about 30 minutes per visit. Users over 25 typically come 12 times a month, spending 20 minutes. When advertisers see those numbers, I suspect their face looks like of Indiana Jones’ when he found the Holy Grail. Aside from big events like the Super Bowl, those age groups are increasingly tough to reach as they consume more news on the web than in print and they’re eschewing traditional television for services like Netflix and Hulu.

The problem is that Snapchat’s returns are diminishing even before the first share of publicly traded stock has changed hands. Snap has lost $1.2 billion since commencing operations in 2011, losing $514.6 million last year alone. That’s not terribly unusual for a tech startup, but the more troubling metric is its user growth. Growth in daily active users was up 5% in the final quarter of 2016, compared to 11% in the year-ago period.

Calling the tastes of teens and young adults fickle, especially when it comes to messaging platforms, might still be an overestimation of their attention spans. That could be part of why growth is slowing, or it could have something to do with the fact that bigger competitors are already circling in. Facebook has already introduced features similar to what Snapchat offers, plus Facebook already is established in foreign markets.

Tech IPOs have also been something of a mixed bag over the past year or so, reminding me of that “Hot-or-Not” website that was such as big deal when I was in school. I don’t mean to suggest IPO market operates in similarly poor taste, but there have been plenty of tech IPOs lately that just haven’t felt the love and, so far at least, Snap seems to be one of them. Aside from the hype that you’d expect from tech-focused publications, most others have decidedly been in the “not” camp.

I wouldn’t be surprised if, on top of the weak revenue and growth numbers, that has something to do with Snap’s peculiar share setup. It will be using a three-share system: the Class A shares sold in the IPO won’t have voting rights, leaving its founders with the majority vote. I don’t know about you, but if I give a company my money to invest, I want at least some voice in how it’s used.

I don’t mind going after a big win on an IPO, but in Snap’s case, I’ll take a pass. Just because Snapchat is hot now, I wouldn’t be surprised if the markets are saying “not” later.

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Thank you Benjamin Shepherd for this enlightening article.

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