Snap, the parent company of Snapchat launched its IPO amidst a lot of buzz last week. The shares were initially priced at $14 – $16, but the price continued to surge just in two days. Immediately after the launch, the shares were trading at $24, much higher than the expected pricing. On Monday morning, Snap shares were open at $28.17 which was 4% higher than Friday. However, on Tuesday, the IPO buzz had subsided and the price was at $22.
Even though the price of Snap shares is greater than the expected value, most of the Wall Street experts believe that Snap shares are overvalued. Seasoned investors are not interested in buying Snap shares because they don’t think it is worth the cost. Top analyst surveys indicate that Snap shares are not great to buy. The estimate of share price is between $10 and $23, resulting in an average of $16.5. The valuation has appalled experienced investors because Snap is yet to make any profit. It was clearly mentioned in the prospectus that Snapchat may not generate any profit in the future.
Snap is a small and young company that came up with a revolutionary product which allowed disappearing videos and messages. Snapchat was picked up by the teens immediately after its launch and it was widely used for sexting. The teenage users are not loyal to the brand and Snap is yet to monetize the platform properly. Snapchat is a free app and the revenue can be generated only through advertising. Another alarming feature of Snapchat is the fact that the active monthly user base has stayed flat at 150 million in the last two quarters.
Facebook launched Instagram as a rival to Snapchat and shamelessly copied Snapchat Stories. The ephemeral messaging on Instagram rivaled Snapchat and it is embraced by a mature audience. Instagram is owned by Facebook which has mastered advertising on the internet. Snap doesn’t have the ability or corporate structure to compete with Facebook. The target demographic of Snap is extremely narrow and the app is widely used only in first world countries. While Google and Facebook have an audience of 3.6 billion, Snap is available only to about 650 million all over the world.
While Snap increased its revenue to $400 million from $58 million in just four years, the company incurred $512 million losses. Even though Snap IPO is launched, the company is yet to make a profit. Investors who purchase Snap shares are simply betting that the company would come up with some innovative product that will surpass the popularity and demand of Facebook and twitter. Considering the immature managers and unreliable demographic, this won’t be a possibility.
The share price performance of Snap is surprisingly good despite the challenges faced by the company. Investors are willing to hold on to the shares for at least one year and this has increased the demand in the market. Advertisers too are keen on the target demographic of Snap, which could help the company if it comes with the never-before-seen product that couldn’t be copied by Facebook.