Snapchat’s Day One Success Presents Opportunity and Risk Simultaneously

By now, everyone is familiar with the social phenomenon that is Snapchat. Users can send videos and messages to each other which then self-destruct and erase. The app even notifies a user if someone takes a screenshot of their sent video or picture. On Thursday, Snapchat parent company Snap, Inc. launched its much anticipated IPO, pricing shares at $17, giving the company a market valuation of $24 billion. Shares soared from the opening bell. But given that Snap has never produced a profit, can the company’s day one stock success last?

How Should Traders Respond to Snapchat?

While massively popular among millennials today, not many people would position Snapchat and parent company Snap, Inc. as more valuable than Marriott or Target. Yet, after surging 44% on day one, the disappearing-message app ended the day valued at $34 billion. That makes Snap the biggest company to go public on a U.S. exchange since Chinese e-commerce company Alibaba’s $168 billion launch in 2014. Is the valuation accurate? What’re Snap’s plans moving forward?

Snap may not have any profit, but something it does have? Users.

By the end of 2016, Snapchat had 158 million daily active users. When Instagram was acquired by Facebook in 2012 (at a then staggering $1 billion) the photo sharing app had 30 million active users.

The market is betting that Snap can sustain its eye-popping growth rate and scale advertising accordingly. Snap did have $404 million in sales in 2016, but still lost half a billion dollars last year. So would sustained user growth catapult company revenues?

Snap’s ad revenue comes from sponsored content and video ads, as well as ad “lenses” which let companies pay to have a custom feature representing the brand put into popular usage.
Snapchat is expecting to grow exponentially and bring in $2 billion by 2018. But even then, at its current valuation, Snap would be trading at 20 times revenue – more than 10 times the rate of giants such as Google parent company Alphabet, Facebook, Amazon, and Netflix.

With the influx of cash, Snap can now expand to new projects and develop new ideas, such as their “Spectacles” hardware; glasses that record user views in first person and instantly upload to Snapchat – already in use. But is that really enough to justify its current valuation?

Watch the video from Fox Business regarding Snapchat investment:

While Snapchat can fade out just as quickly as it surged to the forefront of social media, its IPO presents a great opportunity for investors – at least in the short term. Snap, Inc. (SNAP) rose 44% on the day, and should continue to rise UP initially. But over time, expect shares to settle back down as enthusiasm and momentum fade out and numbers and reality become the focus of traders. In the case of Snap, traders would be wise to follow the momentum.

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