Snap Stock Forecast
Snap Inc (NYSE:SNAP), long seen as the first big initial public offering (IPO) domino to drop in 2017, is now public. The SNAP stock price opened at $17.00, but quickly rose by 41.2% at the open, closing on its first day above $24.00 per share. So far, the SNAP stock forecast is looking bright.
But with the initial fervor of a public offering now behind us, what can we expect from SNAP stock going forward? I’ll be examining how Snapchat makes money, and several other factors that will contribute to the potential longevity (or lack thereof) for the world’s newest publicly traded, billion-dollar tech company.
But, before we get to the SNAP stock forecast, let’s recap how Snapchat got to where it is now.
First, remember how terrible 2016 was for tech IPOs. Only 26 tech stocks went public on U.S. stock exchanges in 2016, and they only raised $4.3 billion. Both numbers are the lowest they’ve been since the Great Recession. This vacuum has naturally created an investor group hungry for tech IPOs, as evidenced by NYSE:SNAP’s strong first-day performance.
Then you have a company that some analysts compare to Facebook Inc (NASDAQ:FB) in its ability to reach a wide swath of younger, free-spending consumers. For instance, Ratings agency Nielsen Holdings PLC puts as many as 41% of the 18- to 34-year-old demographic in the U.S. as Snapchat users, which is great news for SNAP stock. (Source: “Snapchat Parent Files for $25 Billion IPO,” The Wall Street Journal, November 15, 2016.)
Another comparison relates back to Snap CEO and co-founder Evan Spiegel and his Facebook counterpart, Mark Zuckerberg. Both became billionaires on the backs of social media empires while in their 20s. And both stubbornly refused to sell their companies, preferring instead to see their creations through until they hit public markets.
In a poetic twist of fate, Zuckerberg’s Facebook had previously sought to buy up Snapchat for $3.0 billion. Where once the Facebook wunderkind was courted by established tech giants interested in acquiring his company, he had become the giant trying to buy out the upstart Snapchat.
In any case, Evan Spiegel and his co-founder Bobby Murphy turned “Zuck” down, which ended up being the right decision. After the Snap IPO, Spiegel is worth around $4.49 billion, while Murphy made off with $3.86 billion. (Source: “Snapchat’s twenty-something founders are each worth ~$4 billion — more than Facebook offered to buy their whole company 4 years ago,” Business Insider, March 2, 2017.)
But Zuckerberg wasn’t through with Evan Spiegel and Snapchat yet. “If you can’t beat ’em, join ’em,” goes the old adage. Facebook took it one step further: “If you can’t join ’em, copy ’em.”
Enter Instagram. The Facebook subsidiary, which also appeals—much like Snapchat—to that important younger demographic, has gone about duplicating Snapchat features. A Pew Research Poll from 2016 pegged 59% of American 18- to 29-year-olds as Instagram users. (Source: “Social Media Update 2016,” Pew Research Center, November 11, 2016.)
The most brazen example of this aping came by way of “Instagram Stories.” Right down to the name, even, Instagram took Snapchat’s “Stories” feature and began offering it on its own platform.
With Piper Jaffray Companies’ (NYSE:PJC) twice-annual survey showing that 32% of U.S. teenagers cited Instagram as their most important social network, you can see how a Facebook-Snap rivalry could be set to only heat up in the future. (Source: “Instagram’s Snapchat replica begins monetizing,” Business Insider, January 12, 2017.)
With NYSE:SNAP now publicly traded, Evan Spiegel and co are hoping that SNAP stock can survive and thrive alongside Facebook. And that’s why it’s important to understand how Snapchat makes money.
How Snapchat Makes Money
Here’s a hugely important question that will have a profound effect on the SNAP stock forecast: how does Snapchat make money? The answer: the same way the vast majority of social media companies do—advertising.
“We generate revenue primarily through advertising,” wrote Snap in its IPO filing. “We help our advertising partners generate a return on their investment by creating engaging advertising products that reach our large and desirable audience.” (Source: “FORM S-1,” U.S. Securities and Exchange Commission, February 2, 2017.)
Ad revenue is almost certainly going to be the number one driver of SNAP stock and the SNAP stock forecast in the near future, and that’s very much in keeping with Facebook’s business model to date.
The vast majority of Facebook’s revenue is also derived from advertising. The company collected $26.885 billion in ad dollars in 2016, and that well looks to be in no danger of drying up anytime soon. (Source: “Facebook’s advertising revenue worldwide from 2009 to 2016 (in million U.S. dollars),” Statista, last accessed March 2, 2017.)
Snapchat has a similar model, though of course nowhere near to the same extent…yet.
Revenue-wise, Snap made $404.4 million in 2016, up a long way from $58.6 million in 2015. But, in terms of net profit, the company reported a loss of $514.6 million in 2016.
While not unusual for a young tech company on the rise to be burning capital at fast rates (ask Uber Technologies Inc.), there’s still concern that Snap could find itself in a Twitter Inc (NYSE:TWTR) situation, where growth and potential never pan out the way investors hoped for.
Chart courtesy of StockCharts.com
But, as an example of how much advertisers are hooked on Snapchat, consider 27-year-old Cyrene Quiamco. With more than 100,000 followers, she is paid between $10,000 and $30,000 to tell stories about advertisers’ brands on Snapchat through a series of short videos.
Stories like Quiamco’s (pun intended) go to show how much advertisers put a premium on the app as a way to reach that desirable younger demographic.
The question is, can SNAP stock sustain its growth?
With the latest leaked numbers putting Snap’s user base at around 150 million, the potential is there for huge advertising revenue and, if growth holds up, bigger payoffs down the line. (Source: “We’re about to learn everything we’ve wanted to know about tech’s most secretive company,” Business Insider, February 2, 2017.)
But we begin to see the problem with that thinking when we consider another social media giant, Twitter.
As mentioned before, Twitter had a similar scenario. A lot of hype surrounding its IPO, initial gains, strong growth, everything is great, then…boom. Growth slowed, features didn’t pan out, and the company otherwise had no answer for the challenges it faced, leading to a 62% decrease in share value since it went public.
The question now rests on which story you believe will play out for Snapchat. Which leads us to our next question…
Should You Buy SNAP Stock?
The SNAP stock forecast for 2017 is all over the place, and what it is very much depends on how you view the Snap story playing out.
If you’re of the mind that Snap has the potential to be the next Facebook then, by all means, jump on board.
If, however, you see more Twitter in SNAP stock, then your SNAP stock forecast in 2017 will be quite a sight dimmer.
Another nugget to consider: SNAP’s price-to-sales metric, derived from dividing Snap’s market valuation by its revenues, is wild.
Snapchat’s valuation came in at a whopping $28.3 billion, which—divided by its revenues in 2016—comes to over 70 times more than its revenue. Facebook, by contrast, has a price-to-sales ratio of less than 13 times. Most other tech giants are well below even Facebook’s number, making Snapchat’s valuation truly an outlier. (Source: “Here’s How Insanely Expensive Snap’s IPO Will Be,” Fortune, February 2, 2017.)
Of course, Snapchat’s revenue grew exponentially from 2015 to 2016, far faster than Facebook or more established brands can replicate. But the question then becomes whether Snapchat’s revenue growth will be enough to justify such a huge valuation compared to its sales.
With such an absurd valuation compared to its nearest competitors, there’s plenty of reasons for a more cautious investor to take a second look at the stock before jumping all-in. If the SNAP stock forecast shows naught but boom times ahead, then the valuation can be justified. But if not, then it’s reasonable to be a concerned with SNAP stock going forward.
Snapchat also found itself in a little hot water over some questionable sales tactics, in a scenario in which it pitted a gun safety non-profit group against the National Rifle Association in a bid to sell ads on a piece produced by the Snapchat news team.
Everytown for Gun Safety, the non-profit, was working with the news team for a
“Guns in America” Live Story tied to National Gun Violence Awareness Day when Snapchat’s head of political sales Rob Saliterman stepped in, according to a leaked e-mail.
“I would urgently like to speak with you about advertising opportunities within the story, as there will be three ad slots,” said the message to Everytown from Saliterman.” We are also talking to the NRA about running ads within the story.”
While there’s nothing directly wrong or technically unethical about what transpired, the company faced criticism nonetheless for the optics surrounding the whole ordeal.
But where does all this leave us with SNAP stock?
There’s certainly value to be had in NYSE:SNAP, especially if the early run continues. What’s next for the company in the long-term, however, is harder to say. Revenue is likely to grow but, with profitability an issue, a crazy expensive valuation, and Facebook breathing down the company’s neck, I could understand why investors may want to sit this tech wave out.
Ultimately, it comes down to your comfort with risk and your belief in whether Snap Inc can join the pantheon of great social media companies. For now, only time will tell.