Snap Inc., the parent company of sexting app-turned media giant Snapchat is going public this week, with its shares beginning trading on the New York Stock Exchange under ticker symbol SNAP Thursday.
And while investors are drawn to the ability to tap into a demographic that’s hard to reach through traditional TV channels (and the possibility of getting on the next Facebook at the ground floor), investing in Snapchat isn’t a sure thing. For one, the company is losing more and more money and its growth is slowing. And founders Evan Spiegel and Bobby Murphy have structured the offering so they have ironclad control over the business for the long term.
But massive tech companies don’t go public all the time, especially ones with as much fanfare as Snap. Expect a pop on its first trading day, but for those (fortunate enough with access to the IPO) still weighing whether to buy some shares, here are some pros and cons.
These are three reasons to invest in Snap:
1. Massive user base
Snapchat had 158 million daily active users at the end of last year, and those users are concentrated in affluent areas. The majority of its users are aged 18-34. That’s a valuable demographic that advertisers and brands have been battling to throw money at, especially because they don’t seem to be tuning into a major traditional channel to reach them — linear TV.
While Snapchat’s user base pales in comparison to Facebook’s 1.23 billion daily active users, it’s more than 50 percent bigger than Netflix, which has 93 million subscribers. Scale like that, especially given its demographics, is extremely valuable to advertisers — and often, intoxicating to investors.
2. Tremendous engagement
Even more important than its raw user number is the degree to which Snapchat users are obsessed with the app. According to its S-1, Snapchat users 25 and older visited the app about 12 times a day, spending about 20 minutes, while younger users visited it more than 20 times, spending more than a half-hour a day on the app. To compare, Facebook, which everyone in the world seems to be glued to at all times, averages 50 minutes a day of engagement per user globally.
“They have a great amount of engagement,” Eunice Shin, a managing director at Manatt Digital, told TheWrap. “Engagement numbers are even stronger between the ages of 13 and 22. I think that is a tremendous win. Kids don’t even text each other — they snap each other.”
3. A successful — if short — track record with advertisers
Snap, which earns substantially all its revenue through advertising, included several examples of successful cooperation with brands in its S-1 — explicitly highlighting the fact that its core audience is increasingly watching video content on their phones instead of a TV.
In its filing, Snap mentioned a sponsored geofilter (a filter available in a particular area) deal with athletic wear company Under Armour that was viewed 60 million times and created a 78 percent increase in purchase intent — more than five times the norm — according to market research firm Millward Brown.
However, Shin said Snap has room to grow as far as providing more detailed analytics to further demonstrate to brands the value of advertising on Snap. She said Facebook — which itself had a rough IPO before becoming one of the market’s stalwart performers over the last few years — had more of this stuff figured out when it went public
“The more analytics they provide, the better it’s going to be,” Shin said. “That’s why Facebook is doing such a good job. That’s really where Snap needs to show more. I do know that they are working on it. It just hasn’t got to the point yet where it’s completely satisfied the needs of all the brands.”
However, despite the pros, here are three reasons to hold on to that cash burning a hole in your brokerage account:
1. Slowing growth, increasing losses
Snapchat’s user growth slowed last year. Daily active users grew 7 percent between the second and third quarter, but was flat through the fourth. Meanwhile, the company lost $373 million on $59 million in revenue in 2015, while it lost $515 million on $405 million in revenue last year.
Snap didn’t shy away from the worst case scenario in its S-1, warning investors “if our expenses exceed our revenue, our business may be seriously harmed and we may never achieve or maintain profitability.”
However, Shin said she’s not concerned by all the red ink, saying Snap has barely scratched the surface of its opportunity to grow its ad revenue.
“Once they’re able to turn on more capabilities to place ads, their revenue opportunities are going to be significant,” she said.
Entertainment attorney Glen Rothstein said while some observers might see those losses as a “lack of financial responsibility and out-of-control spending,” it’s fair to also draw an analogy to Facebook, “which experienced a terrible IPO but skyrocketed once it got its fiscal house and other business and advertising affairs in order.”
2. Founders Evan Spiegel and Bobby Murphy essentially have all voting rights
Snap isn’t a company that can be run by a plug-and-play CEO — Spiegel is widely regarded as one of the top product-thinkers in the tech industry, and people who buy Snap stock are betting on him. Still, the company’s ownership structure is unusual, which Snap acknowledged in the S-1.
“Although other U.S.-based companies have publicly traded classes of non-voting stock, to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange,” the filing said.
That means Spiegel and Murphy could make a deal the majority of stockholders don’t support. However, Shin is less concerned, pointing out that the founders have surrounded themselves with smart advisers, including Snap board chairman Michael Lynton, the former CEO of Sony Entertainment.
3. Facebook connects the world. Snap mostly connects U.S. teens and millennia
“Our products often require intensive processing and generate high bandwidth consumption by our users,” Snap explained in its S-1. “As a result, our users tend to come from developed countries with high-end mobile devices and high-speed cellular internet.”
Because of that, Snap’s user base is concentrated in countries and regions where high-end smartphones and robust cell networks are commonplace. While that’s a valuable demographic, especially with advertisers struggling to reach teens and millennials on linear television, Snap’s basic tech requirements limit its user base in a way Facebook’s and Twitter’s lower threshold do not. That doesn’t mean Snap is done growing, but it has a much harder path adding users outside the U.S. given basic economics.
Facebook’s Instagram, with its new Stories feature, has also duplicated many of Snapchat’s previously distinguishing characteristics, making it an extremely deep-pocketed competitor.
There’s also the fact that in countries like China, there are existing apps like WeChat with massive user bases that might not be incentivized to try Snap, especially given its technical requirements.
“Snap has primarily been a North American product with a North American user base,” Shin said. “In Asia and most of the rest of the world, they’re on messaging apps already. They do pretty much the same thing that Snapchat does.”