Can the Snapchat IPO Show Investors the Money?

If Snap, Inc. wants to thrive as a public company, it needs to prove it can make profits

     

Snapchat filed for its long-rumored IPO this week, and may go public as early as March. Because the photo-sharing app has so many users, anticipation ahead of its offering could approach Facebook Inc (NASDAQ:FB) and Twitter Inc (NASDAQ:TWTR) levels. But those are two very different paths.

Can the Snapchat IPO Show Investors the Money?Sure, both are uber-popular social media giants used around the world, but only one of them has had success as a public company.

After rocky start in the year following its ballyhooed May 2012 IPO, Facebook has morphed into one of the best growth stocks on the market, rising 243% since its debut.

TWTR has gone the other direction: the stock has lost more than half its value since its November 2013 IPO.

Why the cavernous discrepancy between the two stocks? In a word, profits. Facebook makes money. Twitter doesn’t. And that’s why this week’s Snapchat IPO filing will tell us a lot about whether Snap, Inc. (Snapchat’s parent company) will be the next FB or TWTR.

Snapchat IPO Appears Bloated

As part of its IPO filing, Snapchat — the app that allows users to share photos and videos that disappear within 10 seconds — will, for the first time, reveal its financials. That might not be a good thing.

For most of its brief history, the app has been free. It didn’t start running ads until this past October. Chances are, it’s not a profitable company.

When it went public, Facebook had just made an even $1 billion in net income in 2011. Twitter, meanwhile, lost $645 million in 2013, the year it came public.

But because of all the hype, Twitter’s IPO price became overly bloated, and the company was way overvalued from the get-go, with a market cap of $25 billion. Snap Inc. appears to be on a similar track — based on reports of its latest round of funding, the company could be valued in the $20 billion to $25 billion range when it comes public.

Considering that it just started running ads three months ago, that seems like a rather ambitious valuation.

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