Can the Snapchat IPO Show Investors the Money?

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.

What Snapchat does have going for it is a very large and very young user base. It has more than 100 million active users, and 45% of them are between the ages of 18 and 24. That’s a ripe demographic for advertisers desperate to reach millennials.

We don’t know the numbers yet, but early estimates peg Snapchat’s 2016 revenue at somewhere in the $350 million range — barely more than half Twitter’s full-year sales ($665 million) the year it came public.

Bottom line? All early signs point to Snapchat being overvalued. For that reason, I would avoid the Snapchat IPO at all costs.

Now, that doesn’t mean you should avoid the stock altogether from here to fore — if it gets knocked back in early trading, landing on a more reasonable valuation, perhaps then it will become a lower-risk value buy with loads of upside potential. The fact that the company just started running ads means there’s plenty of room to grow. And it’s in the process of becoming more than just a photo-sharing platform — plans to launch original TV shows are in the works.

Of course, Snapchat could also flop the way TWTR has. Twitter’s sales were actually much better than Snapchat’s at the time of its IPO, if you believe the early estimates for Snapchat’s sales. So the fact that Snap Inc. could command a similar valuation at the time of its IPO is a major red flag.

Tune Out the Snapchat Hype

It seems Snapchat would have been wise to wait another year or two before coming public. At least that would have given its infant advertising-sales model some time to blossom. Perhaps then, its initial valuation would have been more reasonable.

Alas, hype can be intoxicating — and you can expect the hype surround the Snapchat IPO to reach a fever pitch in the next month or two. Just don’t be one of those people who buys into the hype.

Like one of its photos, Snapchat’s hype could quickly disappear once it comes public.

As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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