By Chuckie Keenan
Since its creation in 2011, Snapchat has captivated millennials aged 14 to 35 for its disappearing-messaging service. The app has an average of 158 million active daily users who on average open it 18 times a day on their devices (NYT). To keep users excited about Snapchat, the company added filters in late 2015, which allow users to enhance their “selfie” by making them look like a dog or an older person, for example.
Snapchat’s newest exciting addition? Going public. On Thursday, March 2, Snapchat began selling stock on the New York Stock Exchange under its parent company Snap Inc. The company was valued at over $24 billion before going public. This made it the most valuable American technology company to go public since Facebook five years ago. Snapchat’s offering was priced on Wednesday, the day before the IPO, at $17 a share, a dollar more than previously anticipated. The shares will not have voting rights, which will leave control to Snapchat’s founders. Snapchat co-founders, Evan Spiegel (CEO) and Bobby Murphy (chief technologist), together retain more than 90% of Snap Inc.’s voting rights.
Snap Inc.’s success is foreseen despite the company losing more than $500 million last year due to spending heavily on items such as data storage, marketing, and research. It also has been experiencing a plateauing growth in new growth. This company still isn’t even technically profitably, despite its revenue growing 600% in 2016 to more than $404 million. Snapchat thinks sales can reach $1 billion this year (WSJ). The app is free to download and use, revenue is primarily generated based on big name advertisers such as Gatorade to Tiffany Co. who have run campaigns on the application in attempt to reach the young millennial audience.
Snapchat has timed their public offering at a seemingly perfect moment. The stock market is continuing to surge, thanks to the fed raising expectations of tax cuts, and the new Trump administration encouraging higher interest rates and looser regulations. The Dow Jones industrial average rose more than 300 points on Wednesday March 1, to reach above 21,000 for the first time ever (CNN). U.S. corporations, like Snapchat, are welcoming such change in regulations, as it is encouraging companies to grow and to retain more profits. This, in turn, will allow companies to invest in research and development which will motivate continued innovation.
Snapchat’s CEO Evan Spiegel is often compared to Mark Zuckerberg, founder of Facebook. Both men founded their respective social media sites in college, and reached billionaire status before age 30. While Facebook has recently been accused for copying Snapchat by adding a my story feature to its application, Snapchat has taken a nod from Zuckerberg in taking his company public. Since going public five years ago, Facebook’s shares have climbed more than 254% (NYT).
On Thursday morning, when the IPO was released, Snap Inc. shares rose 44%. Shares opened at $24, above the IPO price of $17, and rose to $26.05 before closing at $24.48 (WSJ). This meant that Snap Inc. was now valued at $34 billion, compared to $24 billion prior to going public. On its first day, more than 215 million shares were traded, which made it the most actively traded U.S. stock on Thursday. This trend is not uncommon for tech IPOs. A so-called “pop” is the gain from the IPO price to the first day’s closing price. In the past two years, of the 50 tech companies that have listed on US exchanges, approximately 80% of those companies have followed this trend and have closed higher than their IPO price on the first day (WSJ).
Despite Snap Inc.’s initial success on Thursday, investors should be wary. An IPO’s first day of trading isn’t necessarily indicative of long-term returns. For example, Twitter Inc. experienced an intense IPO pop, as its first day trading closed 73% higher than its IPO (WSJ). However, the company is experiencing stalled growth which cut its market value in half from its original public debut in 2013. Since Snapchat is already experiencing stagnated consumer growth, they should be wary about following a similar trend to Twitter in the future.