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Snapchat cashes in with a massive IPO

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The teen sensation is growing up

Photo by Amelia Holowaty Krales / The Verge

Snap, the parent company of the popular messaging app Snapchat, is extremely popular among teenagers. That makes sense; it has a lot in common with teens. It’s a trendsetter copied by older, less hip tech companies. And it has proven to be very good at burning through the money it makes.

The company went public this morning. It got off to a good start, opening at $24 a share, well above the range it had targeted. At that price the company is valued at over $30 billion. It also means Snapchat left nearly a billion dollars in cash on the table by underestimating investor demand.

The big question in front of investors is whether Snapchat, in a year or two, will look more like the next Twitter or the next Instagram. Can it convert its highly engaged base of young users into massive global audience? Or will it remain a large but relatively niche platform never embraced by the mainstream? “Snap Inc.'s valuation at $17 a share, or $24 billion as a business, is a stretch at best - and most likely one of the most overvalued IPOs in recent years,” says Clement Thibault, a senior analyst with Investing.com.

A few months back, Snapchat changed its name to Snap and declared itself a camera company. This move was paired with the release of its first hardware product, Spectacles, which were well reviewed and, thanks to clever marketing and limited availability, highly sought after. Hardware offers Snap a way to escape the fate of Twitter. Even if it can’t reach the scale of a Facebook or Google, it can pair its advertising revenue with hardware sales.

For the time being, however, Snap’s gadgets represent just a tiny portion of its overall revenue, and it isn’t clear if they generate a profit. The company overall is losing money at a spectacular rate, and it made it clear to investors that it had no plans to alter this approach in the near future.

That means the unflattering comparisons to Twitter are easy to make. Both have earned a reputation for being confusing to those outside of the network and those who haven't yet learned its intricacies. Both failed to capture the profits that Facebook had when it went public. And like Twitter, Snapchat is showing signs that its best days for user growth may already be behind it.

Snap has repeatedly pointed to the explosive growth of its revenue as a sign that its business has big potential. But unlike Facebook, Snapchat does not have a way to pinpoint the true identity of users. At best, they can pair location with a guess at age and gender. And unlike Google, it does have a deep understanding of purchase intent. Like Twitter or Tumblr, anonymity, or at least ambiguous identity, is the standard for Snapchat.

So much of Snap’s value is tied up in its brand and its leadership, namely the handsome poster boy Evan Spiegel and his enviable lifestyle. Snapchat lacks the adult leadership embodied by a Sheryl Sandberg. In fact, the head of its advertising division, the person responsible for generating those eye-popping revenue gains, recently left the company. The shares it is selling in the IPO offer no voting rights, so investors will need to have full faith in its young leadership’s judgement.

One of the amazing things about Snapchat was how unapproachable it was, intentionally so, for most of its life. It made a game of discovering the intricacies of its interface, something that was uniquely appealing to a generation that grew up with a smartphone in their hand. And it showed it can take risks by going after the product — smart glasses that act as a camera, at which Google failed so spectacularly. For users, Snapchat was always about presenting a less manicured, more authentic version of yourself, and the company has a similar ethos.

But the IPO process however has revealed that Snapchat cannot keep up that fashionable pose forever. It had to make a lame video explaining for stockbrokers how its app worked and laying out the details in the boring legalese required of filing with the securities and exchange commission. Investor demand for Snap right now is premised on the company’s strong appeal to young consumers and enviable product vision.

That potential is enticing enough to cover the stink of Snapchat’s slowing user growth and mounting losses. Once it starts reporting quarterly earnings, however, this potential will need to manifest quickly. Without it, the company may find itself in Twitter’s position: used by hundreds of millions of consumers, but struggling to turn a profit and attract top talent.