With 158 daily active users and over $404 million in revenue in 2016 (up from just $58 million the year before), Snap’s core app, Snapchat, has impressive user engagement. The company itself is led by a forward-thinking CEO in Evan Spiegel, whose investments in R&D (Snap’s Spectacles, for instance) and acquisitions of Looksery & Bitstrips have competitors copying Snap instead of getting ahead of them.
However, now that the notoriously private Snap has pulled back the curtain on its financials & user numbers, the IPO that was once compared to Facebook is looking a bit more like that of another social network—Twitter. And given the troubles the latter has had of late, potential investors should take heed to these three major red flags that have emerged from the public availability of the Snap IPO numbers.
Imitators Stealing the Spotlight
Instagram Stories already has almost as daily users as Snapchat—even though the latter had years on the former—and with Instagram cloning disappearing messages in DMs as well, there’s little differentiation left between the two products. Facebook’s core app is reportedly getting in on Stories as well, potentially further devaluing Snapchat’s USP (and causing an additional slowdown in user growth).
Lack of Profitability
While it’s certainly not unusual for start-ups to operate at a loss before going public (as Twitter was before its IPO), in Snap’s case, there is a reason for concern. The company’s substantial revenue growth YoY is remarkable; however, the aforementioned slowing user growth, combined with the fact that it draws 100% of revenue from advertising (with more advanced formats being relatively new products for Snapchat), means that a potential downtown in impressions will lead to decreased cash coming in over time.
This is all besides the sheer volume of the losses at Snap. Though the company earned over $400 million last year, they lost nearly $515 million during the same period of time—$170 million of which came in Q4 alone. While some of this can be attributed to Spectacles and their costly (though innovative) “Snapbot” vending machine sales approach, this is quite a lot to make up for with just ad revenue.
No Shareholder Voting
Holders of Class A common stock have no voting rights. As a result, holders of Class A common stock will not have any ability to influence stockholder decisions.
Spiegel & co-founder/CTO Robert Murphy will control the majority of voting shares in Snap; not uncommon, but for a company with substantial annual losses, a slow-down in user acquisition, imitators up the wazoo, and no clear (communicated) vision on the future of their hardware line, investing in an IPO with zero say in the direction that company takes in the future might not be a risk investors see as one worth taking.
That’s Not to Say…
…that the Snap IPO numbers equal certain doom. Far, far from it. This is a company that just began recognizing revenue two years ago, and has shown it can innovate like no other social media company out there.
Still, whether investors find those facts—and the vision of Evan Spiegel—worth gambling on is a story waiting to be told.