22 April 2019
Snapchat’s biggest user group, youngsters, may not be the main target of most advertisers. Photo: Reuters
Snapchat’s biggest user group, youngsters, may not be the main target of most advertisers. Photo: Reuters

Why investors should say ‘no’ to Snap IPO

Snap, the parent company of messaging app Snapchat, has filed to go public in the United States. The initial public offering is expected to raise US$3 billion, valuing the company at US$20 billion to US$25 billion.

The IPO might be a success amid the recent surge in interest in technology stocks, but personally I would not want to invest in the company.

The niche and major appeal of Snapchat, in a sense, is also its big weakness.

Snapchat has successfully built a huge following among millennials. In the US, nearly 70 percent of Americans aged between 18 and 24 have installed the software.

However, young users usually lack purchasing power.

Consider this: if you want to place an advertisement targeting the mass market, and had a choice between a TV station that has high ratings at prime time, and another that only has popular kids program, which one will you pick?

The answer is not difficult to guess!

Well, Snapchat will be attractive only to advertisers selling products to the young generation, but not for items like cars or houses.

Another thing is, young users like Snapchat’s key feature — the disappearance of a message, or “snaps”, after they are read.

But adults may prefer to save some precious moments rather than deleting everything.

It’s going to be rather hard for Snapchat to expand its reach into the 30-50 age group, the one that has the highest spending power.

The people factor is also critical when investing in a company.

Snapchat was founded by Evan Spiegel, now 27. He might be good at innovation, but how about management capability? Snap’s board is dominated by venture investors, rather than seasoned managers.

Also, the firm has a valuation of around 60 times prices/sales ratio despite posting a huge loss of US$500 million last year. By contrast, its profitable peers only have a price/sales ratio of 4 to 14 times.

In a winner-takes-all business, I can’t see how Snap can beat its bigger rivals to justify such expensive pricing.

This article appeared in the Hong Kong Economic Journal on Feb. 13

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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