Snap IPO Trouble: Snap Says Its Competitive Advantage Is Weak

Snapchat IPOInvesting in Snap Stock Is a Journey into the Unknown

Snap Inc, soon to have the stock ticker NYSE:SNAP, filed for its initial public offering (IPO) last week, and the business and tech media is abuzz with its comparisons with the social media giant Facebook Inc (NASDAQ:FB).

However, it would help the potential investors of Snap stock to read what the self-proclaimed “camera company” has said about its business competitors in the Snap IPO filing.

In its Form S-1, Snap says that it faces significant competition in almost every aspect of its business, both locally and globally. This includes bigger and more known companies such as Apple Inc. (NASDAQ:AAPL), Facebook Inc (including Instagram and WhatsApp), Google parent Alphabet Inc (NASDAQ:GOOG, GOOGL) (including “YouTube”) and Twitter Inc (NYSE:TWTR). (Source: “Form S-1 Registration Statement,” U.S. Securities and Exchange Commission,  February 2, 2017.)

Moreover,  Kakao Corp (KOSDAQ:035720), Naver Corp (KRX:035420) (including Snow), Tencent Holdings Ltd (HKG:0700), and LINE Corporation are also the potential competitors of Snap Inc.

In a nutshell, companies which offer their users different products, services, content, and online advertising offerings, or products and services that may directly compete with specific Snapchat features, all pose challenges to the Snap Inc business. This  may lure away its user base, which mostly consists of teens and Millenials in the age bracket of 18–34 years.

Snapchat further says that this demographic may be less brand-loyal and more likely to follow trends than other demographics, which means that whatever innovative products that Snap Inc introduces in the future, may not be liked and used extensively by its user base.

The company goes on to say in the Snap IPO filing that the barrier to entry for new entrants is low, and that the switching costs to another platform are also low. Given the fact that most of the current competitors have better resources and a bigger international presence than Snap Inc, it may be difficult for the company to make much headway in global markets.

Snap Inc admits that Facebook, Google, and Apple could use their strong presence in one or more markets to gain competitive advantages against Snap by adding features into products that they control, such as web browsers, search engines, or mobile device operating systems, or by integrating competing social media platforms.

What gives more trouble to Snap stock is the strategy of Snap Inc, as explained in its U.S. Securities and Exchange Commission (SEC) filing, which implies that the company’s cash burn may never end: “Our strategy is to invest in product innovation and take risks to improve our camera platform.”

This leads to another big problem for Snap stock investors, also clearly mentioned in the Snap IPO filing – that the company may never turn profitable.

Here is a snapshot of selected consolidated financial data shared by Snap Inc in its prospectus.

Year Ended December 31
2015 2016 % change
(in US$ thousands)
Revenue 58,663 404,482 590%
Cost and Expenses:
Cost of Revenue 182,341 451,660 148%
Research and Development 82,235 183,676 123%
Sales and Marketing 27,216 124,371 357%
General and Administrative 148,600 165,160 11%
Total Costs and Expenses 440,392 924,867 110%

(Source: Ibid.)

Revenue grew from almost $59.0 million in 2015 to about $405.0 million in 2016, which is phenomenal, and is the only silver lining here. It is true that the company has built an over-$400.0 million advertising business in a short time span but, as mentioned earlier, nothing can stop competitors from copying Snap Inc’s popular features or products.

As is clear from the company’s financials, although Snap made about $405.0 million in the year, it spent almost $925.0 million, and this figure is not likely to come down any time soon.

In short, Snap Inc would be investing heavily in its product development and its sales and marketing efforts, not to mention the huge payments it will make for “Google Cloud Services.” All this means is that it would be long before Snap Inc investors could see any profits flowing in.

Snap Inc co-founder and CEO Evan Spiegel could come up with another product which could be as popular as Snapchat, or which could be given a miss by its users. Investing in the Snap IPO requires taking a big leap of faith as Snapchat faces strong competition from all quarters. However, the company may achieve success as a niche player, focusing on a particular geography and demographic. Investors should value the company as such, and not expect it to become the next Facebook.