Snap Files For An IPO: Anticipation Galore

Snap Inc., one of the biggest private tech companies best known for its social media app Snapchat, will launch a massive IPO in 2017 1Q.

Bloomberg and other publications reported that Snap will seek to raise as much as $4 billion and have the company the company valued from $25 to $35 billion. A successful Snap IPO would be huge not just for Snap, but for tech companies in general. Tech IPOs raised just $7.1 billion in 2016, a 58 percent drop. If Snap’s IPO work outs, that could encourage other companies and “unicorns” to go public as well.

Details remain light, as Snap’s filing was reportedly confidential, which is permitted if the company made less than $1 billion in revenue. Like so many tech companies, there are questions about how Snap can monetize its user base. These questions are further exacerbated by Snap’s unique nature and demographics. But the biggest tech IPO in two years is not one to be ignored, and there is a lot to like about this company’s prospects in the short term.

The hot new social media app
Older individuals may be confused about the rise of Snapchat’s popularity, but Snapchat has clearly become the app of choice for younger people from their teens to mid-20s. These individuals no longer have to think about how a particular picture will look on your Facebook (NASDAQ:FB) album, but can just snap where you like and share it easily.

Many advertisers are interested in catering to this demographic, and Snap wants ad money like every other social media company out there. But advertising on Snapchat is very different with both advantages and disadvantages which every company must consider.

The first good thing about Snapchat is that its unique nature has enabled it to keep the interests of its users. Since Snapchat’s videos and photos cannot be saved, users are more engaged when they are on Snapchat compared to other social media apps. This makes them more likely to see and react to advertisements.

However, Snap charges more from advertisers compared to Google or Facebook, which limits the ability of smaller businesses to advertise on the platform. Another, bigger concern is that advertisers have complained about how Snap is much less transparent about its metrics compared to its competitors. While brands will continue to flock to Snapchat given its growing popularity, Snap still needs to make a real effort to attract them.

Monetization
This concern about advertising is critical because Snap needs to figure out how to turn a profit if it intends to go public. Complete details about Snap’s financial numbers are lacking, but we do know that it lost $128 million in 2014, which was when it started to start taking monetization seriously. Since then, Snap’s revenue is expected to reach up to $350 million by the end of 2016 and $1 billion in 2017.

In addition to advertisement revenue, Snap also recently released Snapchat Spectacles to rave reviews from consumers and tech bloggers alike. Snap has launched an excellent marketing campaign, using surprise vending machines all over the U.S. to attract interest while making it clear that anyone can buy the spectacles for just $130. The fact that Snap is moving into hardware that is clearly connected with its core business is a good sign of the company’s continual determination to innovate.

But while Snap may be attracting interest from consumers and advertisers, it faces plenty of competition. Facebook has begun testing facial recognition software similar to Snapchat’s, and Instagram still has almost twice as many users. Facebook is making these changes to increase video and media sharing on its website and is thus a direct challenge to Snapchat’s niche.

Wait and Watch
Given that Snap will not go public until March at the earliest, and the lack of clear VPN reviews as of this time, it is too early to reach a firm decision. On one hand, Snapchat is a rapidly growing social media app which will see its revenue skyrocket in 2017. On the other hand, Snap needs to figure out a road to profitability and ensure that it can continue to grow and retain its user base.

I do think that Snap, in the first few months, will do very well, but it is difficult to tell over the long term. Snapchat may be popular with teenagers now, but that is a fickle demographic which will not react well to increased, intrusive advertisement. When a new social media app appears, will Snapchat be able to keep its old user base and attract new teenagers? And will it be able to handle competition from its larger social media competitors.

These concerns should not take the fact that a tech IPO of Snap’s size is an exciting thing. The company has at least a few months to convince investors. Let us see if it can make a good case.