Snapchat Will Have To Hold Back Its IPO Until 2018 At Least

  • Investors continue to pour money into Snapchat, boosting valuation to $18B.
  • A leaked revenue outlook unveils a disappointing growth trend that reflects steep multiples.
  • In the case that Snapchat does not launch a new game-chasing feature to boost revenues, it will have to postpone any IPO plans.

The popular messaging app Snapchat raised an additional $1.8B in an extension to its Series F funding round which hiked its valuation to $18B after the company raised $175M earlier this year at a $16B valuation. The increase in valuation highlights the strong investor interest in Snapchat amid the slowdown in private equity markets and the freeze in the IPO market. It is interesting to see investors pouring so much money into Snapchat, a messaging app mostly popular among 13 to 24 years olds, while concerns about overvaluation and valuation bubbles in the unicorn market exist. As shown in the chart below, Snapchat has increased its valuation rapidly between 2012 and 2016, and the company is currently one of the top-ten most valuable VC-backed tech unicorns.

Snapchat_chart 3_060116

Even though the valuation increase and share price boost are significant pieces of information, the most interesting data from the recent funding round is the revenue data, which reveals that the company generated only $59M in 2015 and the company’s outlook for 2016 and 2017 indicates that its revenue growth trend might be slower than previously assumed. A slower-than-expected growth rate has substantial implications on Snapchat’s future.

Snapchat's Revenue Growth Significantly Lags Valuation

Taking the revenue data that Snapchat provided from 2014 to 2017 and extrapolating it until 2019 unveils a troubling revenue multiple that could prevent the company from going public. Snapchat unveiled a revenue outlook that reflects an incredible three-digit 5-year CAGR, which is still lagging behind the growth in its valuation. A midrange estimation of 2019 P/S for Snapchat of 15.5 could make it very difficult for the company to go public and remain attractive for investors. Investors who expected that the company would go public in 2016 or 2017 can see the unattractive multiples, which can not support such a high valuation in case of an IPO and might force Snapchat to postpone its IPO for a later time. This is a huge disappointment for investors who believed that Snapchat would go public in 2016 or 2017 so that they could cash out on their investments.

Snapchat_chart 4_060116

A Delayed IPO Could Hurt Snapchat Valuations

However, pushing the IPO further away could have a negative impact on Snapchat and its valuation. Currently, Snapchat is a very hot and trendy company to invest in, but if Snapchat does not monetize its growth in 2017, the company might find it very difficult to do so later on as the buzz might fade away and as other messaging applications still dominate the messaging market and add features all the time. In this scenario, if Snapchat doesn't launch any amazing new feature that will attract many new users and advertisers to boost revenues significantly to improve multiples and enable a near-term IPO, the company might have a not-so-bright future. Instead of going public, the company could choose to remain private, sell parts of it to the higher bidder or could even follow the path of other apps that rose on buzz and ended up closing the business like Meerkat.

Also read: Twilio Is Not Your Typical Unicorn

A slightly more optimistic scenario indicates that Snapchat will reach reasonable multiples for an IPO only in 2018 which could drive a 2018 or 2019 IPO. In my opinion, this is too far for a company like Snapchat that greatly benefits from the buzz around it that will fade away with time, and an IPO in 2 or 3 years will be very difficult to sell as investors interest will slowly fade out.

Unlike other prominent social media IPOs such as Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and LinkedIn (NYSE:LNKD) - Snapchat is not a one-of-a-kind or unique platform. It has some unique features, and it is very popular among 13- to 24-year-olds, but it doesn’t bring any added value feature that other competitors cannot develop. While the three social media companies mentioned above are industry leaders with regard to innovation and creating new segments from scratch, Snapchat only rides the messaging and social media waves and created an app that appeals to young audiences alone. Snapchat's competitors could easily take over its market share by offering similar features, which would force the company to look for new growth drivers that are still missing for now.


Unless Snapchat launches a new, game-changing feature soon to attract new users and advertisers and boost revenues, the company cannot use the hype around it to maximize returns from a potential IPO as investors want. At this point, with no further information, Snapchat IPO will not happen anytime soon, if the company goes public at all. In the highly improbable scenario that Snapchat goes public soon, it will not be the attractive opportunity many expect it to be.

Lior Ronen Lior Ronen   on Amigobulls :
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