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Some Scary Realities Investors Face with the Snap IPO

Some Scary Realities Investors Face with the Snap IPO

Ahead of the Snap IPO, some scary realities are coming to light.

OK – let me start off by acknowledging the fact that I’ve talked about this topic ad nauseam, but as we’re only a day away from the Snap IPO, I feel it is my duty to share with you some final thoughts about the biggest tech IPO in quite some time. After all, the company is looking for a market valuation of up to $22 billion, so at the very least, it’s worth discussing.

Profitability

In 2016, Snap’s net losses were $514.6 million, and it has noted that it ‘may never achieve or maintain profitability’. That’s standard practice for any startup, and Snap’s 2016 was a big year in terms of innovation, product research and development, product launches, acquisitions, and more money-draining activities. They also saw their revenues shoot up significantly, but remember that 2016 was their first full year of sales, and there were plenty of marketers and big spenders looking to get involved with the medium in terms of advertising. Snap still hasn’t created a product or service that appeals to SMBs in terms of both pricing, returns and data. This is an area of concern that I’ve noted for a while, and if they can’t create a product that non-Fortune 500 media companies can leverage, long-term sustainability is going to be a problem – assuming they continue to focus on themselves as a media company, and not a ‘camera company’ as they’ve indicated in their IPO filing.

Mission

Snap’s core product is Snapchat, and that has driven a lot of users to engage with the brand every single day. But Snap rebranded itself in preparation for its IPO and labeled itself a camera company. The launch of Spectacles created a lot of buzz, but that buzz has turned into novelty. Are people really going to walk around all day with (ugly) glasses that record brief videos of what they’re doing? The short answer is no. And that reality has hit quickly in places like San Francisco and Los Angeles, where the streets are littered in sunglasses-clad individuals, and none of them wearing Spectacles. It also doesn’t help that they are wildly overpriced (at the moment) and offer no real value beyond the excitement of using new technology.

Snapchat Spectacles Manhattan Pop Up Shop
A long line forms outside the now-closed Spectacles pop-up shop in NYC.

It’s easy to get early adopters excited enough to fill a Manhattan pop-up shop, but a few pictures of long lines are good short-term PR, not a long-term sales strategy. Google Glass, the 3D printer market, and a whole lot of wearables also confused novelty with business value. Where are they now? That also opens the door for another major red flag with Snap.

Control

In a first-of-its-kind IPO, Snap will not be offering any voting rights to its new shareholders. Snap’s done a great job of building a product that over 150 million people like and use, and they have turned that into a media platform that big-budget advertisers are willing to pay for, but let’s be frank, they’ve made a lot of big mistakes when it comes to their business moves. They tried offering Lenses for purchase to users a month after the product was released and were lampooned by customers. They have also moved backward in terms of the user-friendliness of once-beloved products like Stories, which has made way for Instagram to catch up and, in the opinion of many, surpass Snapchat. With years – YEARS – of time to innovate and evolve, how has Snapchat allowed an incoming product that is very clearly a conceptual copy (Instagram Stories) to overtake its market share and blame that product on Snapchat’s slowed user growth (more on that below)?

It should scare investors that leadership refuses to give up any control in terms of how day-to-day operations are conducted considering the major missteps this leadership has made once competition has arrived on the scene. Yes, competition will always mean unprecedented hits to metrics such as growth rates and usage rates. That’s just a reality of doing business. You would think, however, that Snap would have planned for the arrival of a competing product considering Facebook made it very clear that they wanted a part of the pie Snapchat had to itself for so long.

Excuses

I have already mentioned the always-troubling statement that startups make regarding the possibility of never achieving profitability. That’s standard, so it can be overlooked by potential investors. What can’t be overlooked, however, are the excuses Snap is making for its slowed growth.

First of all, there is the major concern regarding innovation. Instagram has a better user interface, appeals to a global market (instead of almost exclusively an American market, as with Snapchat) and appeals to a broader range of age demographics (most of Snapchat’s active users are under 25), which is why Instagram has caught up to Snapchat in terms of innovation and usage. Competition is not an excuse for slowed growth, but it was used by Snap as the reason user growth was flat in the final quarter of 2016. When Twitter growth flattened in late 2015-early 2016, many assumed the company was dead in the water and poised for a hostile takeover or acquisition. It’s not all that reassuring that Snapchat user growth is flat pre-IPO.

It is also hugely troubling that Snap has indicated to investors that engagement and growth have slowed because teens and Millennials are not brand loyal. I just finished writing “Marketing to Millennials for Dummies” as part of Wiley’s “For Dummies” series, so I read through and conducted plenty of research into the psychographics and loyalty habits of Millennials. Put simply, Millennials are extremely loyal. The difference rests with the fact that they are not all that interested in the stature of a brand, but rather with the degree to which they can relate to a brand on a personal level. If they are fatigued by Snapchat, it is because Snap has not done enough to connect with them personally or innovate in a way that the market has indicated it wants. To blame it on Millennial and teen consumption and loyalty habits is lazy, ignorant, and from an investor standpoint, very unsettling.

Conclusion

It will be very interesting to see what happens when that opening bell rings. Does Snap have the momentum it needs to rise to the levels of Facebook, or will it crash and burn based on market response? Only time will tell.

Some Things to Watch for Post-Snapchat IPO

Some Things to Watch for Post-Snapchat IPO

The Snapchat IPO is just around the corner, and there are a few key points to pay attention to once the company goes public.

I’ve been fairly vocal about my hesitations when it comes to Snapchat’s big move to go public. The company has done an amazing job building a loyal following, and it’s poised for a monster IPO when it goes public in a few weeks. By raising $3 billion, Snapchat will be worth over $25 billion, and it beat earnings expectations last year while boasting a loyal audience of over 150 million users. So what are some of the things I’m talking about when it comes to hesitations? That has a lot to do with mainstream viability with regards to advertising.

What’s Great About Snapchat

Snapchat has taken messaging and made it something fun and exciting. No matter how many times a user has received a snap, he or she is still happy to see one come in, and the anticipation of opening a snap up to see what someone has sent is as exciting as ever. But excitement does not a $25 billion company make; there needs to be a lasting, broadly-appealing revenue model in order to justify the company’s valuation and keep it going in the long run. There is hope, however.

Currently, Snapchat advertisers are spending more and more with each passing quarter. Snapchat, now Snap, FYI, has also expanded its product offering. The powers that be have seen the opportunity in making the selfie and sharing of everyday, often mundane experiences more lively. It’s not just about adding those filters, it’s about sharing experiences with through the use of things like comments, art, overlays and, yes, filters. I’ve done a lot of research while writing my new book (Marketing to Millennials for Dummies, which is slated to be on shelves this June – #bookplug) and if there is one thing that has become obnoxiously apparent it is that Millennials seek to both have and share experiences. Snapchat offers that, and it is one of the major reasons why the app has done (and continues to do) so phenomenally well with regards to activity and engagement.

But what is missing when it comes to Snap’s potential on the open market?

What’s Missing with Snap(chat)

The big missing piece when it comes to the long-term success of Snap is in its viability as a marketing platform/media buy for SMBs. There are far more small and medium sized businesses out there, and if they don’t see value in leveraging Snap’s products, then Snap is going to have a very hard time maintaining that $25 billion price tag.

Right now, marketers can take advantage of Snapchat’s custom filters for a pretty modest fee – not unlike the very affordable advertising options that exist on social platforms like Facebook or Twitter. The different is in the return generated from the use of these filters. On other social networks, members of a target audience can take some sort of action, like providing data or clicking through to a landing page. Unless you get very creative with Snapchat, like Domino’s did in the UK, you’re going to have a hard time leveraging the network to generate some sort of calculable return. Like Instagram (which has the added benefit of integrating with Facebook) Snapchat exists in the form of mobile application. The thing about mobile applications is that users do not want to have their experiences halted by leaving the app. Add to that the fact that content disappears and insights are limited for advertisers, and Snapchat is at a pretty tricky point with marketers that do not have extensive budgets that can be put towards brand exposure. Essentially, Snapchat needs to find a way to appeal to small and medium sized businesses that can’t afford the massive price tag that comes with Discover ad placements.

So What Should We Expect

The only other tech IPO that is of any interest to the world right now is Uber. Snapchat’s filing has been highly anticipated and the market adrenaline is very high. We can expect to see a similar soar like we did with Facebook when it first went public. (Or maybe the market will be a little more careful this time…) One thing Snapchat has going for it is that it is making a lot of money and has been growing considerably. While losses have shot up year over year, that is to be expected as the company expands into new markets. But will it be able to hit its targets for 2016 and over the course of 2017? That remains to be seen.

Snap is an exciting IPO and if it can find a way to reach audiences greater than Fortune 100s, it will do amazingly well. But just as we’ve seen with television, appealing only to the top 1% as a media buy will not last forever. Snap will need to do a lot of work in order to ensure that the $25 billion valuation is not simply related to the excitement the market feels about the company.

What do you think we can expect to see from Snap after it rings the bell?