Wednesday 22 November 2017

Adrian Weckler: Horror stories may be told of Snapchat IPO

Evan Spiegel of Snapchat
Evan Spiegel of Snapchat
Adrian Weckler

Adrian Weckler

You have to admire the honest arrogance of it.

 Snapchat's pre-IPO documents, filed last week, contain the following pitch from the founders: "We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability."

Tempted? Even if not, others will be. Snapchat is the tech darlin' du jour and thousands will rush to get a piece of it.

But are they charging down a blind alley?

I'm betting the vast majority of this column's readers don't know much about how Snapchat works, let alone how it could make them money.

So here's an advanced beginner's guide to the Snapchat IPO for those thinking of investing, or the merely curious.

1. Is Snapchat the next Facebook or the next Twitter?

This might be the single most important question for investors. As we know, Facebook is an unstoppable financial juggernaut that is crushing everything in its path and raking in money for those wise enough to buy its shares. Twitter, though, can't figure out how to do it. So it has become a compelling news app but is worth only half of what it originally IPO'd for.

So which one is Snapchat? A year ago, Snapchat, which was co-founded by Evan Spiegel looked a lot like a junior Facebook. But now, its growth levels look more like Twitter's - slowing and in danger of freezing altogether.

In its regulatory filing documents, the company admitted that its user growth slowed to a standstill by the end of last year.

It also admitted that Instagram's move to copy Snapchat's most notable features - disappearing messages and 24-hour "Stories" - has hurt it. This is probably going to get worse, as Facebook has just launched its own version of "Stories" here in Ireland as a precursor to a global rollout.

And it's unquestionably having an impact on Snapchat's ability to attract new users, as seen by Snapchat's position starting to fall in the download charts of the App Store.

To be fair, even if Snapchat's growth does trail off, it will still make more money than Twitter in the short term. This is because Snapchat's ad model is far more successful than Twitter's. Snapchat sells video ads that are seen, as well as campaigns around such things as sponsored photo filters that users voluntarily adopt. It also already has more users (186 million daily active users) than Twitter (313 million monthly active users, with no daily figure), despite being only five years old.

2. How much money in advertising will Snapchat make this year?

Most estimates put it at around €1bn. It took in $405m (€376m) in 2016, which was a huge jump on the $59m (€55m) in sales it made in 2014. Then again, to keep that sort of growth going, it has to either keep its user growth levels up (which it may no longer do) or introduce new products and services.

Also, bear in mind that it posted an operating loss of $514m (€477m) in 2016 alongside $405m in revenue. So this is far from a cash cow.

3. If it can't grow much more, what else might it do?

The company recently introduced a physical product, called Spectacles. It's a high-tech pair of fashion sunglasses that take 10-second video clips and post them instantly to your phone's Snapchat account. Snap says that this is just the "first product" on its agenda. It also now describes itself on its pre-IPO form as a "camera company".

4. Is Snapchat just for kids?

You'd be tempted to think so. It's certainly rare to find anyone over 35 using the service. Even in its own regulatory filings, Snapchat admits that those under 25 are by far its most engaged and active users.

With Facebook and Instagram having added Snapchat's main features, it's possible that over-35s in Western countries - most of whom are now using Facebook, according to industry statistics - may never go near Snapchat even out of curiosity. That could be a problem for the company because, as it admits itself in its pre-IPO filings, teenagers are far less brand-loyal than those over 30. On the other hand, advertisers are constantly trying to reach the under-25s. If Snapchat is seen as a reliable place to get them, it may do just fine without middle-aged and elderly users.

5. Does all of this mean Snapchat's IPO might be a flop?

No. The market has been starved of recognisable tech IPOs for more than two years. This is partly because it has been competing with billions in cheap private finance available to tech companies. In 2016, there were just 21 tech IPOs in the US (raising under €3bn), compared to 26 in 2015 (raising €6.5bn). Both years were well down on 2014 (56 tech IPOs in the US raising €28bn). But those companies that did IPO last year made lots of money for their shareholders - tech firms were the best-performing IPO stocks last year, up an average of 40pc on their debut listing price. So there is a discernible appetite there that Snapchat is likely to capitalise on.

That said, high-profile tech companies have not always delivered after a flotation. For every Facebook (up 250pc), LinkedIn (up 200pc) and VMWare (up 95pc), there's a Twitter (down 50pc), Zynga (down 65pc) and Groupon (down 85pc). In all, one out of three publicly floated tech companies now has a price below its first listing level.

A classic case of buyer beware.

Sunday Indo Business

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