Snapchat IPO... The Next Facebook, or Fitbit?

Snapchat has been stealing the headlines so far with their plans to finally go public. The company is looking to raise upwards of $3B to fund, not only user growth, but their entrance into the wearable technology market.

In what is expected to be the biggest IPO so far this year, Snapchat (SNAP) is expected to go public in March. Details are yet to be finalized, but the company is expected to be listed on the New York Stock Exchange between $14 and $16 a share - for a total valuation ranging from $19.5B to $22.2B. SNAP would be the largest private tech company to go public in recent years and many professionals are wondering if this IPO will open the flood gates for other private companies (think UBER and Airbnb) to list publically as well.

But it’s important to take a step back - how does SNAP look as a company? How have previous tech company IPOs faired? The answers to these questions will be important for investors to consider when they consider the merits of adding SNAP to their own portfolio.

For the less technologically inclined, or those living under a rock, SNAP offers a mobile app that allows users to send self-destructing photos to one another. These photos can be uploaded to make a “story”, sent user to user, or posted in groups. The company makes money by selling ad space to corporations and placing these ads throughout the app. Also important to note is that SNAP is facing fierce competition from Instagram (owned by Facebook) and has had some of the features of their app blatantly copied.

Snapchat has yet to create any profits. In their last year, from audited statements filed, the company lost over $500 million. Their continued access to venture capital funding is what has kept the company running since it was founded. While these investors can tolerate a company losing money when the promise of selling the company later looms over their heads... stock market investors are often much less tolerant. Investors demand that the companies they own create profits to continue to grow and provide return - through capital gains or dividends.

Can Snapchat ever make money? Doesn’t seem likely currently.

The company is planning to use the cash they generate from the IPO to fund their entrance into the camera market - through their Spectacles. These sunglasses will be synced to their mobile app to allow users to take photos without ever taking their phones out. While this idea is promising, the company is still tied to their performance of their mobile app.

Recent IPOs of tech companies should serve as a basis for expectation for the SNAP IPO. Twitter, Fitbit, Facebook, and GoPro are all companies that offer a combination of tech products and mobile apps. These four companies can help put into context how SNAP's shares could perform after their initial offering. It is important to remember that Snapchat is still predominantly a social media company, but the money they are looking to raise is going to be used to launch a wearable technology product.

As you can see above, results have been mixed to say the least. Go Pro and Fitbit, who both sell singular focused tech products have seen their shares plunge in the market post-IPO. Neither company has been able to diversify their product line, increase sales or make more per sale to the extent that they’ve become profitable. Throw in the issues plaguing Twitter (which still has more users than Snapchat), and it is evident that recent IPOs have not performed well.

On the other hand, the rise of Facebook has been dramatic. The company has become engrained in the everyday lives of millions, if not a billion plus, users. FB has found ways to sell ads in every way, shape and form. Their platform is more of a way for users to manage their lives, keep in touch with friends and interact with their favourite brands. Companies are willing to pay for ads when they know that millions of users, from every demographic, will log on dozens of times. Most importantly - they’ve become profitable.

Does that sound like Snapchat? Not really. Snapchat is popular among millennials and younger generations as a way to keep social tabs on friends, send funny photos and pass the time. Facebook is still the first place many people will go to message their friends, look for contact information, and get their news.

Facebook captured the social media market early. They offered a full service platform that integrated every aspect of social interaction. Snapchat has yet to do this. What they provide is less developed, integrated and more gimmicky. They’ve now extended their focus to wearable technology - similar to GoPro and Fitbit. It’s quite obvious, as shown above, how things worked out for those companies.

Even more important, to thinking about the company, is that their core app is under siege from Instagram. According to TechCrunch, it only took 25 weeks for Instagram Stories to have more daily posts than Snapchat. Instagram has also added self-destructing photos and personal messaging. How long before users completely switch? With its core product under attack and management hoping to extend itself into a notoriously unprofitable market, SNAP is navigating into dangerous waters.

For investors - based on difficult dynamics in both the wearable technology and social media markets - it’s much more likely that Snapchat shares follow the trend of Twitter, Fitbit and GoPro then the trend of Facebook.