February 6, 2017    4 minute read

Why Snapchat Needs to Turn a Profit Quickly

The New Twitter?    February 6, 2017    4 minute read

Why Snapchat Needs to Turn a Profit Quickly

2017 is set to be an important year for the tech industry on Wall Street, as it will finally see Snap, the mother company of Snapchat, become a publicly traded enterprise. Last week, Snap invited analysts to scrutinise its financial information, as it readies itself to join fellow social media giants on the stock market as early as March.

$25bn is the expected IPO valuation

This filing, expected to value the company at $25bn, will be the largest offering since Alibaba in 2014. In just six years, Snapchat has gone from a class project to an app that serves millions of people around the world.

The value of social media companies is growing at a frightening pace, boosted by millennials gaining easier access to smartphones and the internet, at a younger age. Yet, not every company in the sector has benefitted from this expansion. Whilst Facebook, often seen as the sector’s success story, has evolved its sphere of influence through successful diversification, as well as acquisitions ranging from WhatsApp to Instagram, fellow rivals such as Twitter have hit rock bottom. Will Snapchat be able to ride the storm, or will it vanish along with many others?

Influencing the Youth

Snapchat’s influence is far-reaching. 235 million people use the app every month, with 9000 snaps exchanged every second. Demographically, it is used by 70% of Americans aged 18-24 who own a smartphone. As the values of social media IPOs continue to rise, investors are starting to question whether there is substance to support this boom.

Their suspicion is not without logic. In the case of Snap, net revenue grew seven-fold in 2016, reaching $404.28m up from $58.66m the year before, but this growth was eclipsed by a considerable increase in net loss incurred, $514.64m up from $372.89m the previous year, according to company reports.

The New Twitter?

At the time of Twitter’s – a company comparable in size – filing in September 2013, their revenue for the first six months of the year had doubled to $253.6m whilst net losses came in at $69.3m. These parallels highlight a disturbing statistic: Snap enjoys less revenue and far greater losses. Facebook brought in $3.7bn revenue the year prior to going public, although it had already existed as a private company for eight years.

On paper, Snap is coming to the market with lower revenues and higher net losses than Twitter, a company that failed to meet expectations. So, will its stock price move in the same downwards direction? A deep dive into these numbers would say otherwise. Snap Inc boasts a similar size user base, although it is growing at a rate faster than that of Twitter, which saw a 34% drop in growth in the year prior to filing.

$1.05is Snap’s revenue per user

Snap also enjoys healthier revenue per user at $1.05, compared to $0.64 per Twitter user. Revenue stream diversification, an elusive achievement never attained by Twitter, is enjoyed by its rival; Snap boasts diversified income, with not one single advertiser or content partner accounting for more than 10% of revenue.

When going public, the majority of Twitter’s revenue originated from mobile advertising (65% of total ad revenue), which dwindled as the company struggled to embrace real-time news, diversify revenue streams and expand internationally.

Getting Hopes Up

The problems of expansion and diversification are already being addressed by Snap. Last year, the company rebranded as ‘Snap’ and dived into hardware, launching the ‘Spectacles’ which are a pair of sunglasses containing an in-built camera that syncs to the app and allows the wearer to save and share photos. Chief strategy officer Imran Khan talked of a drive to “reinvent the camera…(to) improve the way people live and communicate”.

Snap must continue to prove that it is ‘bigger than one app’ if it is to avoid the same problems facing competitors in this sector. Snap’s filing stated that:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

This is usual rhetoric from youthful social media tech stocks. However, whilst it has so far been enough to satisfy private investors, who have, to date, thrown $2.4bn at the fledgeling company, Snap will not have much time to prove its worth. It may appear to have the answer to many of the problems troubling investors, now only time will tell if this social media IPO will be a success story, or the sign of a bubble that will call into question the value of the entire sector.

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