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A Snapshot of Snap’s IPO

Snap Inc., the parent company of Snapchat, is the latest technology giant to file for an IPO (initial public offering) in an attempt to sell their shares to the public. Snap is a particularly interesting company because while they’ve been extremely successful with product innovation, they’ve struggled recently with financial success.

Since their founding in 2011, Snap has created dozens of new products that have driven user growth to 158 million DAUs (daily average users). Research firm Goodwater Capital cites Facebook and Twitter’s DAUs at the time of their IPO at 483 million and 100 million, respectively.

Snap’s DAU are better than Twitter at the time of IPO but are dwarfed by Facebook

This has not gone unnoticed by the tech community. Ben Thompson, founder of popular technology blog Stratechery, described Snap’s management team as, “the most innovative in tech, brilliantly laddering up to new opportunities, and creating new markets.”

Snapchat’s founding team has shown strong product innovation over time

However, Snap has been having much more trouble on the revenue side. Compared to Facebook, Snap’s revenue per user is not on par. Facebook amasses eight times more revenue per average user than Snap, all while Snap’s cost structure is more challenging. Snap acknowledges and explains their cost difficulties in their IPO prospectus: “Our products often use new technologies and require people to change their behavior, such as using a camera to talk with their friends. This means that our products take a lot of time and money to develop, and might have slow adoption rates.” Their innovative products need to directly lead to profit to keep the company financially healthy.

The presence of established advertising competitors like Facebook and Google only makes Snap’s struggle much tougher. According to Peter Kafka of the technology blog Recode, in the first half of 2016, Google and Facebook’s combined mobile ad revenue grew by 103%. “When you back out Facebook and Google, the digital ad industry actually shrunk in first half,” Kafka said.

Snap is a clearly innovative company with a lot to learn on the financial side of their business. Ben Thompson eloquently stated the dilemma of Snap’s IPO on The Bill Simmons Podcast, “Basically, you bet on Snapchat because you believe in Evan Spiegel, and I actually think that is a valid reason to bet on them, but it is a pure bet.” In other words, if you trust Spiegel and his product genius then buy Snap, but be aware of the financial headwinds they will face going forward.

 

 

(Image Courtesy of New York Post)

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