Snapchat is all set to begin its roadshow to pitch the stock to potential investors, becoming the largest U.S.-listed tech offering since Alibaba Group Holding Ltd.’s (BABA) IPO in 2014.
The parent company Snapchat has announced its intention of raising $3 billion in its IPO. Listed as a camera company in the New York Stock Exchange, SNAP will be a Class A common stock with a valuation between $19.5 billion and $22.2 billion. A remarkable increase in the revenues of the company, from $58.7 million in 2015 to $404.5 million in 2016, changed the financial landscape of the company. The difference between 2015’s fourth quarter revenue of $32.7 million and 2016’s fourth-quarter revenue of $165.7 million is commendable, with a sheer majority of its revenue from North America, followed by $14.7 million from Europe and $5.7 million from the rest of the world. The major source of this upsurge in revenues has been advertising. The number of the application’s daily active users rose from 110 million in December 2015 to 161 million in December 2016 (Ciaccia, 2017).
The recent launch of wearable glasses, Spectacles as an extension of the company has also been an important reason for its revenue growth. This new addition of this hardware product is likely to bring additional competition for the company.
However, Snapchat is not all about increasing revenues, its losses have also been on an increasing trend. During the year 2016,the company incurred a loss of $515 million which is much more than the loss of $372.9 million in the previous year. One of the major causes of this increasing loss is the increase in operating losses. Negative cash flows from operations and operating losses are expected to be a part of an ever-changing and dynamic company. Hence, unforeseen expenses, operating delays and other unknown factors are expected to bring these losses even in future periods,making profitability a big challenge (Investopedia, 2017).
Its IPO filing is also expected to bring additional legal and accounting expenses. Therefore, increase in revenues, especially at a greater rate than the increase in expenses is very crucial for the company at present. Snapchat has been one of the most innovative companies, hence being the strongest contender for the title, Company of the Year by Inc. Magazine. in 2016.
CEO Evan Spiegel has proved that he believes in making things new and has showed a penchant for innovation. Partnerships with dozens of publishers on the Discover platform has been key to expanding its audience. This year, the company capitalized on its Discover feature, that kicked off in 2015. In addition, deals and tie-ups with major publishers, including NBC and The Wall Street Journal, as well as sports leagues like the NFL, where these publishers own and publish content on their own snapchat channels, proved to be one of the most successful features and an essential source of increasing revenues for the company.
One of the chief concerns for Snap is engagement with maximum users between age groups of 18-34 years. The launch of Instagram Stories feature has been attracting some engagement away from Snapchat. Hence, Snap’s S-1 specifically called out Instagram as competition for the company. It faces competition from various other applications, but in the year 2016, it surpassed rivals as big as Twitter and Pinterest, hence, turning out to be the fastest-growing social media company in the U.S.
In my opinion, in a very short five year history of Snapchat, it has made good decisions that have worked in the best interest of the company. One of them being, turning down a $4 billion acquisition offer from Facebook in 2014. In 2017, with its IPO expected to be in the $19.5 – $22.2 Billion range, the company is already worth five times Facebook’s offering price turning out to be the one of the biggest U.S.-listed tech IPOs in history.