Snapchat is about to float on the US stock market for the first time, and when it does it’s set to make its founders a lot of money.
In the run-up to the launch, the surprise $24 billion valuation of parent company Snap Inc has been met with more than a few raised eyebrows – particularly because Snapchat has never made a profit and has significantly fewer users than some of its social rivals.
So, how did Snapchat get valued so highly?
— ✨j a m i e c o o k✨ (@JamieCook1995) February 3, 2017
Ahead of actually entering the stock market, Snapchat announced what’s known as an IPO (initial public offering), which puts a starting price on the first shares based on investor interest in them and effectively values the company.
For Snapchat, this was higher than expected and analysts haven’t stopped analysing since.
Why all the excitement?
— GoodLuckKristen (@GoodLuckKristen) January 25, 2017
The reasons for the high valuation and subsequent response to it vary depending on who you ask.
Stuart Miles, founder of technology news site Pocket-lint, said having the younger generation interested is Snapchat’s biggest asset.
“It’s all about users and in this case everyone is keen to have access to young, edgy users,” he said.
Snapchat’s selfie-driven service is big for younger users and, as a result, the app is synonymous with millennial culture.
“Snapchat has been successful, certainly compared to others, in appealing and connecting with those users,” Miles added.
“They might not have the most money, but the feeling is if you can get them young, then you can keep them for a very long time into the future.”
So why was everyone so surprised?
— Narsha N. 👩🏽💻📸 (@NarshaCo) February 14, 2017
Snapchat has never made a profit, not since its creation in 2011, but now it has the biggest valuation for a US technology company since Facebook floated on the stock market in 2012.
It’s also getting increasingly squeezed by Facebook and others who are replicating its key features in their own apps in order to grab a share of the younger market themselves.
On top of that, there is the issue of users. Snapchat has about 160 million – which is not to be sniffed at but is lower than the likes of Twitter and a tiny fraction of Facebook.
That drop in user growth should serve as a warning to any potential investor, according to Neil Wilson, a senior market analyst at ETX Capital.
“The drop-off in user growth really does need explaining and needs to be turned around sharpish,” he said.
“Snapchat added 15 million users in each of the first three quarters of 2016 but this decelerated to just five million in the last quarter – the weakest increase since Q3 2014.
“The big question is: how long will its teenager customer base stay loyal before they move on to the next thing?
“It’s also got a serious competitor in the shape of Facebook and its new Instagram Stories service which launched last summer, and seems to be behind the drop-off in Snapchat user growth.”
So what is likely to happen?
— Rosina Teri Memolo (@RosinaPhoto) January 25, 2017
Generally, market analysts have said Snapchat does have the potential to float successfully like Facebook and avoid the uncertainty that has dogged another social network, Twitter.
Jordan Hiscott, chief trader at Ayondo Markets, said: “What sets it apart from other messaging apps like WhatsApp? For me it’s the innovative features built into the app’s interface, such as the lenses function.
“A pertinent point in the company’s S1 filing for the IPO is that it doesn’t call itself a messaging service but a camera company.
“This seems to be an intentional move to differentiate it from Facebook and Twitter, and the success and failure of their respective IPOs, which in my view, is very clever.”