Snap’s Potential IPO Values Company North of $25 Billion

Snap’s app enables users to send photos and messages that vanish within seconds of being read

s1Snap Inc., the maker of photo-sharing app Snapchat, is working on an initial public offering (IPO) that could value the company at $25 billion or more, as reported by The Wall Street Journal on October 7th, 2016. Snap’s mobile application enables users to send photos and messages that vanish within seconds of being read. The Company is now looking to make its maiden market debut in March 2017.

An IPO valuation of $25 billion would be significantly higher than Snapchat’s most recent valuation of $17.81 billion, based on a $1.81 billion financing round in May 2016. It would also represent the largest IPO by a technology company since Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE: BABA) went public in 2014 and ahead of Visa Inc.’s (NYSE: V) $17.9-billion market debut. Interestingly, Alibaba had invested $200 million in Snapchat in March 2015.

Run-up to the IPO

Snap Inc., which changed its name from Snapchat Inc. on September 24th, 2016, to reflect its broader ambitions, has been talking to investment bankers about an IPO towards the end of 2016 or early 2017. Snap’s valuation has grown over the last few years as the company added advertising and sponsored contents to its messaging service, paving the way for the Company to predict $1 billion in advertising revenue in 2017.

Snap garnered $3.1 million in advertising revenue for the first 11 months of 2014 and is expected to have 58.6 million users in the U.S. by the end of 2016. According to research firm eMarketer and as reported by The Wall Street Journal, Snap’s user base is expected to jump 13.6% to 66.6 million by 2017. Despite these projections, Snap has cause for worry since its IPO launch comes at a time when shares of technology firms such as Square Inc. (NYSE: SQ) and Box Inc. (NYSE: BOX) that went public over the last two years are trading well below their private market valuation.

s2Snapchat’s growth in popularity

Snap Inc., founded in 2011 by Evan Spiegel, belongs to an elite group of technology startups with a valuation of over $10 billion. The Company has already raised more than $100 million of financing from investors including Lightspeed Venture Partners, Benchmark, Institutional Venture Partners, General Catalyst Partners, and SV Angel. While the Los Angeles-based company has plenty of users, it is still in a growth phase. Snap’s recent round of funding would no doubt enable the company to build its business and gain the technical ability to do this.

In 2013, Facebook Inc. (NASDAQ: FB) had tried to buy Snapchat for $3 billion; after the deal fell through, Facebook started its own visual messaging app Slingshot on June 17, 2014 to send ephemeral photos and videos. With its rising popularity among the teen population, Snapchat is estimated to be used by about 10% of teens globally. In May 2014, Snapchat updated its app to include video features, following which users can enjoy live video calling as well as text-based conversations, joining the crowded mobile messaging market. Snapchat’s popularity has continued to grow, with people sending more than 700 million disappearing “snaps” a day and more than 500 million stories viewed daily, according to the company.

Foray into consumer electronics

s3Snap announced on September 24th, 2016, that it will release a wearable gadget called Spectacles, which resembles a pair of sunglasses with a built-in camera for shooting video. A limited supply of the product will be sold in the 2016 fall season for $129.99. Spectacles will be available in one size and three colors. The wearer can tap a button near the hinge to record video of up to 10 seconds using the wide-angle lens on the glasses.

Spectacles, which represents Snap’s foray into consumer electronics, captures video in a new circular format that can be viewed full screen whether holding a phone upright or on its side. The device transmits the recordings wirelessly to a smartphone. Evan Spiegel, Snap’s CEO and co-founder, had been testing a prototype of the glasses since at least early 2015.

Facebook snapping at the heels

After Facebook’s failed attempt to buy Snapchat, the social media giant has rolled out a new feature called Messenger Day, which lets users post photos and videos that disappear after a day, on October 3rd, 2016. Messenger Day reportedly tries to clone Snapchat’s “Stories” feature and is now available in Poland. Messenger Day appears at top of the conversation list in Facebook Messenger. Users can add animated text and graphics to pictures or video snippets before sharing them. Earlier, Facebook announced that users can soon go live from the face-swapping MSQRD app and utilize different Snapchat-like masks and filters while the video is running.

Snapchat is mainly targeted at the teens and young people, who are quick to adopt new technologies. The startup is also made its foray in the field of digital messaging and competes with companies like WhatsApp Inc. However, Snapchat faced major issues when users said that Snapchat’s built-in friend-finding feature could be used by hackers to discover users’ phone numbers through its address-book-lookup tool, which in turn could expose users’ information to advertisers and spammers. It remains to be seen how Snapchat will effectively use the IPO funding to address these concerns and increase its platform and user base in the future.

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