The months-long euphoria leading up to Snapchat’s big debut on the New York Stock Exchange is fading quickly, as an almost befuddled confusion sets in among investors as to what the real long-term value of the company is.
Let’s just backtrack a little bit for a second — last Thursday, the visual-messaging behemoth began its existence on the stock market. Up until that point, Snapchat was not a publicly-listed company, meaning that you or I could not purchase any kind of stock ownership in the company.
Snap Inc.’s Initial Public Offering, or IPO, priced each of its 200 million shares at $17 US each, bringing the overall worth of the company to a grand total of $3.4 billion.
Now that same Thursday, fresh off the hype of Snap’s IPO, the stock shot up 44 percent, bringing the value of one Snap stock to $24.48. Things were going on track for co-founders Evan Speigel and Robert Murphy, who struck gold when they pioneered the feature of having photos and videos play in a quick loop, then disappear.
But since Monday, Snapchat’s stock has been tumbling. As of Tuesday afternoon, the stock was down 11 percent from its Thursday debut. The catalyst to that decline were a bunch of reports from tech analysts warning investors to take a step back and evaluate the company’s true growth potential.
How does Snapchat make money?
Snapchat makes its money from advertisers. The advantage it used to have over Facebook and Twitter, was that it was a leader in the photo/video platform, an avenue advertisers seem to adore. But Facebook, which owns Instagram, quickly caught up with Snapchat by introducing “Instagram Stories”, a feature identical to Snapchat that allows users to build a series of photos and videos in a loop.
There’s evidence that the story feature on Instagram has indeed affected Snapchat’s user base. According to the financial advice site ValuePenguin, the number of people downloading Instagram’s app has accelerated in the last six months. Meanwhile, Snapchat added 36 million users in the first half of 2016, but only 15 million in the second half.
Those bullish on Snap stock argue that the company’s future potential lies in the fact that most of its users are under the age of 25. In fact, according to a recent company filing, users visit the app at least 20 times a day, and spend an average of half an hour viewing stories and sending pictures. That’s a whole lot of ad time.
But part of the problem is that the stock might have been overvalued to begin with. Tech analysts Laura Martin and Dan Medina of Needham wrote in a note that Snapchat’s total potential market is 80 percent smaller than Facebook — SNAP already has 50 percent penetration of this market, meaning there’s not a whole lot of room left to grow.
Also remember that large tech IPOs are built on hype, for the most part — according to data from Reuters, 25 of the largest tech IPOs have flopped in their first year on the market, with 16 of them declining heavily in their debut day.
So you might be tempted to slap a whole lot of money down on Snapchat because it sounds like a cool stock to own, but the consensus seems to be that you won’t be getting the bang for your buck. Snapchat is a successful company, but it remains to be seen whether or not that success can be sustained in the long-run.