Snapchat, the popular photo messaging app, has expressed an intention to go public later this year. Many are excited for a chance to invest in the highly successful app. However, others are skeptical of their valuation which could be as high as $30 billion.
One hundred and fifty eight million people use Snapchat daily, and 300 million people use it every month. The main selling point of the company is the userbase’s demographics. 37% of the users are aged 18-24, a group of people who are notoriously hard to reach by advertisers. In fact, snapchat claims that they reach 41% of all 18-34 year olds in the US on any given day. This allows the company to charge premium prices for advertisements. Critics believe their ad prices are too inflated and don’t allow for a healthy return on an advertiser’s investment. Snapchat commands a $40 CPM (cost per thousand impressions) for their video ads. This is well above the internet-wide average of $3 CPM for videos, $7 CPM for ads on Facebook, and $25 CPM for a 30 second prime time television spot. This has dissuaded many advertisers from even testing campaigns on the platform.
Snapchat will IPO with a valuation anywhere from $25 billion to $30 billion. According to a recently released filing, Snapchat generated $405 million in advertising revenue revenue in 2016. They estimate the company will make as much as $1 billion in 2017. However, the company lost $514.6 billion last year. In their filing, they stated “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” Amazon has proven that major corporations can operate unprofitably but still maintain high valuations, but many more critics are growing increasingly skeptical of this business model.
On the other hand, Snapchat has proved not to be a passing fad. Its founder, Evan Spiegel, has been compared to Steve Jobs, an executive who doesn’t write code but instead can consistently lead a team to build hit products. Additionally, despite high prices, Snapchat’s massive reach among young affluent consumers is very attractive to advertisers. Numerous Snapchat advertising campaigns have been tracked and proven effective. Moreover, their revenue has increased much faster than other tech companies, and is showing healthy indications that it will increase further. Based on its semi-proven track record, many investors speculate that the company will generate much more value in the future.
It will be interesting to see the fate of the stock. Will the bearish analysts calling Snapchat “total junk” be right? Or will optimistic bullish investors prove to be correct and make a healthy return?
