- Snapchat is reportedly preparing for a 2016/2017 IPO.
- A mix of volatile macroeconomic factors, increasing competition, growth challenges, and steep valuations suggest that Snapchat could hold back its IPO.
- In current terms, the Snapchat IPO is a risky investment.
The rapidly growing messaging app Snapchat is reportedly preparing for an upcoming IPO at the end of 2016 or early 2017. Snapchat is the hottest rising star in the messaging and social media market, and it seems that everyone is trying to get a piece of the company before it goes public. The company raised $3B fairly easily at a whopping valuation of $18B, which makes Snapchat one of the ten most valued VC-backed startups alongside Uber, Airbnb, Didi Chuxing, Palantir and more. The strong investor interest in the company made the Snapchat IPO a much-awaited event that is expected to match the magnitude of Facebook (NSDQ:FB) or Twitter (NYSE:TWTR) in terms of media coverage, investor interest, and demand for shares.
Also read: Snapchat Progresses Towards An IPO
In an earlier article that was published in June, I analyzed a possible Snapchat IPO based on internal financial data that was leaked to the media. Based on that dataset, I created three growth scenarios that are presented in the chart below and reflected a steep mid-range P/S ratio between 59 in 2016 to 15.5 in 2019. In that article, I concluded that with Snapchat's unattractive multiples and only a few differentiating features compared to other messaging apps, it would have to hold back its IPO at least until 2018. Until it goes public, the company could generate new differentiating features to accelerate growth and boost its ad sales to increase revenues. In the meantime, Snapchat does not look so attractive.
Three months have passed since that article was published, and Snapchat's unique features are not so unique anymore since Facebook targeted Snapchat users with plenty of new features across its apps. Instagram launched Instagram Stories, which, just like Snapchat Stories, allows users to create a slideshow consisting of short videos and photos taken in the last 24 hours, which will disappear after that period. Facebook Messenger launched a Snapchat-like instant video feature that allows two parties in the same conversation to share short videos as part of the conversation. The latest part of Facebook’s war against Snapchat was releasing new Snapchat-like stickers and photo-editing features in WhatsApp.
Snapchat is one of the smallest players in the messaging market according to a statista report. As of September 2016, Snapchat lags behind the Facebook ecosystem with only 200M MAUs (monthly active users) worldwide while WhatsApp and FB Messenger have 1B MAUs, Instagram has 500M MAUs, and Facebook has 1.7B MAUs. Snapchat also lags behind possible competitors like Twitter (TWTR), which has 313M MAU; WeChat, which has 900M MAU; and even smaller players like Skype (300MAU), Viber (249M MAU), and Line (218M MAU).
As a small player, Snapchat's traditional bull cases included incredible penetration among users in the age range of 18 to 24, a rapid growth rate, and significant potential for monetization in the future. As presented above, the company struggles with monetizing its unique features and appeal for particular age segments, and it’s currently a tiny player in the market to attract significant advertisers’ accounts. Facebook’s new Snapchat-like features target the age segment that Snapchat is currently dominating, and when Facebook brings its massive firepower into a war, I’m confident that they will show positive results. As for the rapid growth rate, as long as Snapchat does not launch any amazing new feature that will increase MAU drastically, it will have a problem competing with a social media behemoth like Facebook. This is one reason why I don’t believe that an IPO at the end of 2016 or early 2017 is reasonable.
Another reason why I think Snapchat will not go public anytime soon is the extreme uncertainty in the global markets, which makes it irrational for a growing startup like Snapchat to enter such a volatile environment. I believe that the market volatility will continue around the potential Fed rate hike decision in the September and December meetings. That will create an awful environment for an ultra-growth company like Snapchat to enter the market, and it could be one of the first stocks to get hit in the case of a larger correction or sell-off in the markets.
Also read: Dropbox IPO Could Be Its Swan Song
As presented in the chart below, only 59 IPOs have taken place since the beginning of this year (2016), which is the smallest number of IPOs in the period since the global financial crisis. The increased volatility this year, which included some severe corrections, drove many private companies away from IPOs. Also, as we look forward, we still have the US elections and a potential rate hike in the US that could send the global economy into a turbulent state. Going public with this uncertainty hanging over the global markets is risky.
Of course, no one knows whether the Federal Reserve will raise rates in September or December and what the implications will be; however, adding to the US elections as a force that could shake the markets, one must also consider the continuing fallout from the Brexit decision as well as the French and Italian referendums. The macroeconomics environment is not ideal for a unicorn IPO. Such an IPO needs to create buzz and hype in the media and benefit from a surging market, which will not be the case in the near future. Adding to that the less than impressive growth rates, intensifying competition from Facebook, and steep valuation, I can’t see a reason why Snapchat would prefer raising money from the public market rather than the private market until conditions for an IPO improve.