Snap IPO: is it a new Facebook or more like Twitter?

Thursday 2 March 2017 | 18:18 CET | Market Commentary
Snap has listed on the stock market, selling 200 million shares for USD 17 each, above the indicated range of USD 14-16 share. According to its prospectus, the fair value of the shares was USD 16.33 at the end of 2016. Adjusting for further dilution, the price of USD 17 per share values Snap at USD 23.8 billion. The proceeds of the IPO total USD 3.4 billion, of which around three-quarters (145 mln shares) for the company and the rest for existing shareholders. The IPO can clearly be considered a success, with the stock price already up over 40 percent in the first day of trading.

The bigger question is whether Snap will become one of the internet majors, alongside Google and Facebook, or follow the more difficult path of companies like Twitter and Yahoo. 


Snap has only issued A shares, which don't carry any voting rights. This keeps founders Evan Spiegel and Robert Murphy in control of the company, as their B and C shares carry almost 90 percent of the voting rights. Snap notes itself in the prospectus that this is the first IPO selling only non-voting shares. 

The same as Netflix or Twitter, Snap does not make a profit. While Netflix is using debt financing (issuing bonds), Snap is choosing new shares (equity) to finance its daily business and expansion. With a user base of 158 million, Snap does not appear to have enough scale. Twitter is the strongest of the three, as it generates positive cash flow (in 2016, its cash position rose from USD 911 million to USD 989 million).


The other reason for the IPO is to give existing shareholders an exit opportunity. They can now sell their shares (as long as no lock-up) on the open market. It seems likely that Snap's shares will perform well in the coming period. The IPO was reportedly 10x oversubscribed, the bank managers will support the share price, and there is a limited free float, so less liquidity in the shares. Whatever one may think about Snap's prospects as a business, investors won't want to miss the boat. Even pension funds cannot avoid taking a position. 


Snap has three types of product: the app Snapchat, tools for advertisers (publishers) and its Spectacles. Its growth has slowed recently, raising the comparison again with Twitter. We can think of arguments both for the 'bull' and the 'bear' in this case. 

First the bear case:

  • Its growth is slowing.
  • Snapchat is an app mainly for teenagers. As they get older, they will stop using it. In this sense, it resembles Twitter (market cap: USD 11.5 bln), which also has a limited target group (319 mln active monthly users) and is finding it difficult to expand its reach.
  • The barrier to entry in Snap's market is low. Snapchat's features are easily copied, as Facebook and Instagram have already shown.
  • Facebook (market cap: USD 392 bln) broadened its reach considerably by going mobile. Its revenues from mobile have grown from zero to 84 percent of the total in five years. Even more important, it went from being mainly an app for (former) students, for which saturation could be expected, to an app that has literally the entire world as its addressable market. Snapchat is already a mobile app and so does not have the same opportunity.

And now the bull case:

  • Snapchat has very loyal users. As they grow older, usage will spread to other age groups.
  • It has only just started (2015) monetising its service through advertising.
  • Hardware is a new source of revenue. In addition to its sunglasses-with-camera (Spectacles), there are rumours of drones and 360-degree cameras.
  • "Snap Inc is a camera company", according to the company motto. It wants to re-invent the camera, although it's still early days for the plans.
  • Snap's innovation is accelerating. After its launch in 2011 (as Picaboo), it added one feature (video) in 2012, three in 2013 (Stories, Smart Filters, Replay) and 14 in 2016, from On-Demand Geofilters and Bitmoji to the Spectacles.

Many will be waiting with baited breath for the company's next set of quarterly results. Is the growth recovering? Are advertisers beating down the door? Are the losses reducing? Furthermore, how will Snapchat's functionality develop further and can hardware be a meaningful source of income. It will be some time yet before we know whether Snap has joined the mighty ranks of Google, Facebook, Amazon, Apple and Microsoft or is headed down the less glorious path of Twitter and Yahoo.

Free Headlines in your E-mail

Every day we send out a free e-mail with the most important headlines of the last 24 hours.

Subscribe now

::: add a comment