Should You Buy a Snapchat IPO?

According to a report in The Information, it looks like Snapchat is talking to Wall Street bankers about maybe filing for an IPO later this year or early in 2017. This shouldn’t be surprising. The fact is, the timing looks pretty good for a Snapchat IPO.

Should You Buy a Snapchat IPO?First of all, the equities markets have continued to remain in the bull phase — although, there may still be some trepidation for the next few months because of the wild presidential election.

Next, there are already signs that investors are hungry for fast-growing tech deals — even if the companies are not profitable. Just take a look at Twilio Inc’s (NYSE:TWLO) 267% gains as well as Acacia Communications, Inc.’s (NASDAQ:ACIA) torrid 365% increase.

But perhaps the best comparable to Snapchat is Line Corp (ADR) (NYSE:LN), which came public in mid-July. The company, which is a top chat app in Asia, has seen its shares climb about 38%.

Now as for the timing of a Snapchat IPO, investors are likely to not to get a chance to make a purchase until February of next year. After all, the first half of January is usually slow because of the holiday. But there is also the complexities of pulling off a major IPO, which is likely to involve raising over $1 billion.

Regardless, a Snapchat IPO is sure to gin up tons of excitement — and perhaps stir up interest in other deals. There may even be some pressure for high-profile companies to get serious about doing an offering … say, Dropbox.

Yet Snapchat is likely to have the kinds of financials that will be standout. The buzz — at least from Techcrunch — is that the company posted $59 million in revenues in 2015. But they are expected to ramp to $250 million to $350 million this year and perhaps hit $1 billion by 2017.

The user traction should also be impressive. So far, it appears that Snapchat gets 150 million daily visitors, up from 110 million at the start of the year. To put this into perspective, Twitter Inc (NYSE:TWTR) has less than 140 million daily visitors.

Snapchat also serves over 10 billion video views on a daily basis.

No doubt, the demographics of the Snapchat user base are also attractive. Consider that 41% of the daily users are between the ages of 18 to 34 — a category that is generally tough for advertisers to reach.

Bottom Line on the Snapchat IPO

There are still huge amounts of private capital for hot companies like Snapchat. Because of this, IPOs have not been as important.

But a year ago, Snapchat CEO Evan Spiegel noted: “We need to IPO. We have a plan to do that.”

After all, he can see how important an IPO has been for Facebook Inc (NASDAQ:FB). It has made it easier for the company to attract top-notch employees — who can get liquidity for their options — but also allow for more flexibility with M&A transactions, such as for Instagram and WhatsApp.

Hey, it is important to keep in mind that Snapchat has been ramping up its dealmaking lately. So for Spiegel, he probably sees an IPO as a critical part of his competitive strategy.

However, for investors, there should still be caution. The fact is that the consumer mobile/internet space can be extremely volatile, as seen with the implosions of former darlings like Zynga Inc (NASDAQ:ZNGA) and Groupon Inc (NASDAQ:GRPN).

Oh, and even for those companies that have been able to sustain their growth — like FB and LinkedIn Corp (NYSE:LNKD) — there have also been periodic drops in the stock prices. So patience and discipline can certainly be a virtue when it comes to playing high-flier IPOs.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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