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Snapchat IPO Invites Skepticism, Here's Why

Snapchatlogo1Creating massive buzz in economic circles, Snapchat's parent company's filing of an IPO is one of the most hotly anticipated business moves of the year, but the recent public review has served to increase pre-existing concerns about the future of the company.

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Guest Post by Karol Severin on Midia 

The IPO filing of Snapchat’s parent company, Snap, is one of the most anticipated moves of 2017. But as yesterday brought the opportunity for the public to review the prospectus, it reaffirmed existing reservations about what lies ahead for Snapchat.

User growth is slowing
Snapchat YoY growth of Daily Active Users has been slowing for two consecutive quarters. First just an innocent slide from Q2’s 65% to 62% in Q3, but in Q4 this fell further to 48% with 158 million Daily Active Users. Although the user growth is still significant in absolute terms, globally Snapchat added 51 million daily active users in 2016, while Facebook added 189 million in the same period. Of course, this is attributable to Facebook’s growth outside North America and Europe but even in these regions, Snap has been outgrown in terms of net new DAUs in the last year – and that’s despite the fact that Snap (unlike Facebook) included Mexico and the Carribean in its North American DAU count. This unusual geographic labelling could indicate that Snapchat has a need to inflate the North American (key for business) engagement results, or they wish to make it harder to compare with Facebook’s North American engagement – either way, this signals trouble.

Furthermore, in light of Facebook’s increasingly aggressive competition through Instagram Stories and Splash (a snapchat-like app targeting markets where Snapchat doesn’t have significant presence), Snapchat’s global user growth outlook is looking bleaker by the month.

Growth via engagement will be increasingly harder to find
Snapchat acknowledges it will have to focus on finding growth through increasing engagement. But that may prove no easier than hunting user growth. Snapchat says its users spend 25 to 30 minutes on the app every day, compared to 50 minutes on Facebook’s apps. For broader perspective, E-marketer estimated the average time spent on (non-voice) mobile at 3 hours 6 minutes in 2016, among US adults. Video accounted for 29 minutes and Social networks for 32 minutes per day. If this indeed does reflect the mainstream mobile behaviour, and Snapchat already captures 25 mins of it – with Facebook, Youtube, email, mobile web etc. already capturing most of the remaining user’s time, Snapchat may not have that much room to grow in terms of time engagement. As innovative as the product roadmap is perceived to be, there is a cap on the amount of time consumers are willing to spend on their smartphones.

ImagesSpectacles therefore is the strategic pivot for Snapchat and a key driver of Snapachat’s potential future success. Going into non- smartphone hardware opens up a whole new opportunity to compete for users’ time in a space that is not yet captured by the big tech companies. Diversifying further to bypass the smartphone as a digital experience distributor is where Snapchat could gain a competitive edge and truly grow engagement. Indeed, the filing lists Snapchat as a ‘Camera company’ – suggesting that there maybe more hardware and innovative ways of using the lense in the future.

Snapchat is struggling to find its way to profitability
As we know, user and engagement growth are everything to Wall Street, when it comes to tech stocks. Especially if you haven’t got a profitable business model, which brings us onto the next point. When Facebook went public, it was already profitable. While it rose to the skies, other social and media companies that struggled with profitability eventually faced the consequence of decreasing stock prices (think Twitter or Pandora).

While Snapchat’s revenue grew from $58 million in 2015 to $404 million in 2016, its operating loss also grew from $381.7 million to $520 million during that period. It is no secret that Snapchat is still trying to figure out its business model, but the inability to even cover its cost of revenue, invites scepticism about Snapchat’s financial fundamentals. In an environment where competitors are largely profitable, the pressure on Snapchat will only increase once it goes public.

Snapchat largely depends on Google
DownloadMost of Snapchat’s infrastructure sits on Google Cloud. The company has commited to pay Google $2 billion (nearly 5x its current annual revenue) over the next 5 years to maintain and expand the infrastructure. This is interesting for many reasons, but to name a few:

  • While Snapchat pays $2 billion to Google, it acknowledges its subsidiary , Youtube, as one of the main competitors alongside Facebook and Apple.
  • Google is getting a great deal. It gets paid handsomely while helping to fuel Facebook’s potential disruptor.
  • Snapchat relies on Google (at least for the next 5 years)

As bright as the future might have looked when Snapchat’s founders rejected Facebook’s acquisition offer in 2013, it is only now that the company is facing a real stress-test in terms of its competitors, its business model and its future strategic vision. If it can withstand all these pressures, then it has a good chance of a successful IPO. However,the fundamental outlook should be one of remaining sceptical- both currently and into the distant future.

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