Snapchat IPO: Why Not to Invest in SNAP and Overhauling Snapchat

Snapchat, the popular ephemeral messaging app, went public in March 2017 with a strong initial market response. However, the journey to long-term success is fraught with challenges. Let's explore why potential investors should be cautious about Snapchat's stock as a long-term investment opportunity.

Financial Statement Metrics

Upon going public, Snapchat (SNAP) provided its financial statements to the Securities and Exchange Commission (SEC). These documents revealed that the company had grown its revenue from $58.7 million in 2015 to $404.5 million in 2016. However, the net loss also increased from $372.9 million to $514.6 million during the same period.

The raising of capital through an IPO is a classic "debt financing" move, indicating that Snapchat needs additional funds to cover its operational losses and debt. This strategy signals potential future revenue declines and highlights the need for thorough investigation into the IPO documentation. Investors must look closely at key metrics such as the Price-to-Earnings (P/E) ratio, operating costs, research and development (RD) investments, and future business plans.

Nature of the Business and Target Audience

Back in November 2013, Facebook's CEO, Mark Zuckerberg, attempted to purchase Snapchat. His goal was to fill in a gap in Facebook's user demographics, specifically targeting younger audiences. However, Snapchat's primary audience has remained teenagers, who are known for their fickle nature and lack of long-term brand loyalty.

Teenagers constitute a significant purchasing power, with spending estimated at $208.7 billion annually. They are highly influential in guiding purchases among their parents. However, this influence is primarily in niche areas such as fast food, snacks, and apparel, which have lower price points. Enterprises and adults with higher spending power in categories like clothing, electronics, and high-end goods are not as strongly influenced by teenagers' recommendations.

Given these dynamics, it is challenging for Snapchat to attract and retain a stable, more profitable adult audience. This poses a significant risk to the app's long-term financial stability.

Senior Management Team Experience

Another critical factor is the experience of Snapchat's senior management team. Unlike some major tech companies, Snapchat does not have a heavily seasoned leadership team led by a well-known founder like Facebook's Mark Zuckerberg. This can be a double-edged sword.

While the young, energetic leadership might bring innovation and forward-thinking, it is also less stable. The lack of a deeper, more experienced management base could pose risks during times of financial or strategic instability. Investors should carefully evaluate the team's expertise, both in handling rapid growth and in adapting to the evolving tech landscape.

Conclusion

In summary, while Snapchat has shown impressive growth initially, it faces significant challenges in maintaining its value as a long-term investment. The poor financial performance, uncertain user behavior, and the risky nature of its management team make the Snapchat stock a less attractive buy at its IPO price. Potential investors should carefully weigh these factors before deciding to invest.

References:

[1] Initial Trading Details of Snapchat[2] WSJ and Barron Ratings[3] Value Investing Criteria[4] Youth Market Research