Don’t get me wrong. I have a Snapchat account and I use it sometimes. But today we are going to talk about the downfall of Snapchat and its mother company Snap Inc.
Snap Inc. is the company behind the Snapchat app. It went public this past March and made headlines all over the world as it was the biggest initial public offering in recent times. Investors were caught up in the hype but it was hard to value a company such as Snap Inc.
Snapchat: the lowdown
The Snapchat app itself is hard to use if you are new to it. Snapchat is, of course, being compared to Instagram and Facebook, both of which you only scroll up or down, press ‘like’ or comment. In Snapchat, you can decide which ‘stories’ you can see. You select what you want to see and, if it is boring, you can skip it. If you like a ‘story’ you can watch it repeatedly; that’s creepy though – don’t do it. When you send a ‘snap’ to a friend you can decide if it’s visible for up to 10 seconds. The same applies when you upload a ‘snap’ into your story.
Snapchat is all about sending and receiving images or videos that automatically disappear. If you need to know more about how it works, check out this video. The complexity of Snapchat put off some investors, as older people are not familiar with apps. By older people, I mean people over the age of 29. Some investors eventually got their head around Snapchat and have put their money in.
Snap Inc. has been valued as high as $25 billion. The stock has gone up and down and in circles. Since the IPO, the stock went as high as $27 per share in March, only to crash as low as $18 per share in May. Snap Inc. is not a stock for people with heart problems. It’s a wild ride that many investors are not ready to take.
In my opinion, Snap Inc. is overpriced. In the same way that Shakira’s hips don’t lie, neither do cash flows. Since its inception, Snap Inc. has not done anything other than burn through cash pile after cash pile.
Sad but true, Snap Inc. needs a lot of cash just to operate. Which means that when a crisis arrives, it is very likely that the cash the company needs to function may not be there anymore.
To put things into perspective, Alphabet, Google’s father company, is valued at six times its yearly revenue. Alphabet is a consolidated business that is already profitable and has piles of cash stored in tax havens. Facebook, Snap’s biggest competitor and the greatest threat to its existence, is already profitable and has a price-to-sales ratio of only 14. Now that we have seen these tech sector titans, let’s look at Snap. A mere $404 million revenue in 2016 and a $25 billion market capitalization, which gives us a market capitalization to revenue ratio of 61. Snap Inc. is not only expensive, it is hugely overpriced. It seems that nowadays anything that uses the word ‘tech’ is worth billions without question.
Snapchat is popular among the young, and it’s fun to use. But it isn’t worth as much as many people think. It’s not profitable now, it wasn’t profitable before, and it may never be profitable. Even so, Mark Zuckerberg got really vexed with Evan Spiegel after Facebook failed to buy Snap Inc. So, he turned into a malevolent bully and thought: “If we can’t buy you, we will copy you.” Then, countless Snapchat clones appeared on our social networks. WhatsApp, Facebook, Facebook Messenger, Instagram, and we’ll only have to wait a couple of weeks until we see the ‘stories’ feature in yet another social network.
It would seem as if an epic battle is brewing. The Goliath Facebook, with its business expertise and huge resources, is about to clash with the young David, Snap Inc. Suddenly, 2017 seems more interesting. The Silicon Valley giant will face the company that money couldn’t buy, at its own game. It sounds like a story we could talk about for months, analyzing each competitor’s strategic moves. But as the battle is about to commence, Evan Spiegel needs to surprise us with a great innovative move that would make investors doubt a Facebook victory.
Without a knockout punch from Snap Inc., it’s hard to cheer for Spiegel’s side. Snapchat runs the risk of being the next Twitter or just sinking without a trace until, finally, Facebook throws it a lifeline.