Snapchat IPO: Lofty Snap Inc (SNAP) Walks on Eggshells

Snap Inc (NYSE:SNAP) has gotten off to a solid start with its initial public offering. So far in early trading, SNAP stock is up about 45%. So what’s next for investors? Are there more gains left?

Lofty Snap Inc (SNAP) IPO Walks on Eggshells

Well, as I’ve noted before, the Snapchat IPO is likely to provide plenty of opportunities for short-term traders. Just some of the reasons include:

  • The float is relatively small at 200 million shares. And 50 million will be locked-up for one year. As a result, it will not take much buying to move SNAP stock.
  • The markets are extremely bullish right now. So investors generally have a healthy appetite to take on risks.
  • There has been a dearth of hot IPOs. In other words, there is little choice, but for investors to focus on SNAP stock.

Yet, perhaps the biggest factor is that the company is still in the early stages of monetization. This means that — for the next couple quarters — there should continue to be substantial gains in revenues, which will certainly gin up lots of buzz for SNAP stock.

Competition and the Snapchat IPO

IPOs can quickly flame out, especially those in the tech sector. Just some of the recent examples include Twilio Inc (NYSE:TWLO) and Fitbit Inc (NYSE:FIT). It’s never easy to keep up the momentum — and cater to the outsized expectations of Wall Street. Even a minor slip-up can have a major impact on the stock price.

Now as for the Snapchat IPO, there are certainly plenty of things that could go wrong. Let’s face it, the majority of the company’s users are in the age group of 18-24, which can be fickle. It’s also unclear how responsive they will be to advertising.

At the same time, Snap Inc will have challenges in getting an increasing share of the digital ad opportunity. The fact remains that rivals like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have diverse platforms that scale across the world. For the most part, these companies can provide the kind of brand campaigns that move the needle for large companies, such as The Coca-Cola Co (NYSE:KO), Procter & Gamble Co (NYSE:PG) and General Motors Company (NYSE:GM).

By comparison, SNAP is still in the early stages of building its ad infrastructure. There is also not much of a track record to evaluate the results of campaigns. Oh, and more importantly, Snap Inc only has one app. Basically, all the company’s proverbial eggs are in one basket. Meanwhile, it looks like FB is focused on fighting hard against SNAP. Granted, the early efforts were embarrassing, as seen with apps like Poke and Slingshot.

But FB has been taking another tact — that is, leveraging its existing assets. In fact, since launching the Stories feature in Instagram in August, there are already 150 million users using it. This is close to the user base of Snapchat!

The Biggest Problem for the Snapchat IPO

I think it’s something that gets little coverage: the structure of the company. You see, Snap Inc does not have a headquarters. Rather, the company is essentially a hodgepodge of offices.

Now for a scrappy startup, this may be fine. But keep in mind that SNAP has quickly turned into massive operation, with the number of employees spiking from 600 to 1,859 last year. Interestingly enough, the Snapchat IPO prospectus notes:

“This diffuse structure may prevent us from fostering positive employee morale and encouraging social interaction among our employees and different business units. Moreover, because our office buildings are dispersed throughout the area, we may be unable to adequately oversee employees and business functions. If we cannot compensate for these and other issues caused by this geographically dispersed office structure, we may lose employees, which could seriously harm our business.”

Unfortunately, there may already be problems emerging. Consider that there have been technical issues with the Android version of the SNAP app. What’s more, the company blamed this for the recent deceleration in the user base.

So if the corporate structure has fundamental flaws, this may ultimately give Facebook and Google more opportunities to make inroads. Considering the lofty valuation of the Snapchat IPO already, there is really no margin for error — which could mean that the gains for investors may not be sustainable for the long haul.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A BundleFollow 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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