What’s Snapchat, and Why is it Valued at $18.5 Billion?

Do you know what Snapchat is?

I have kids, so I’m forced to keep up on the latest computer and smartphone apps. So I do know what Snapchat is. But figuring it out wasn’t exactly the easiest thing to do.

On a basic level, Snapchat is a mobile app that allows users to send videos and pictures. What’s so unique about that? Well, it does so with the feature that those videos and pictures automatically self-destruct after a few seconds of a person viewing them.

While the disappearance element is the most-salient feature of Snapchat, the app also allows users to have a bit of fun with their messages.

Here’s how the website Pocket-lint describes the app’s capabilities:

You can capture a photo or brief video with it, then add a caption or doodle or filter/lens over top, and send the finished creation (called a snap) to a friend. Alternatively, you can add your snap to your "story", a 24-hour collection of all your snaps that’s broadcasted to the world or just your followers.

If you want to try Snapchat, or if you’ve already tried it but just want to get more familiar with how to actually use it (like me), then I recommend reading the Pocket-lint article, as it’s a good “how to” on the app.

Of course, at Uncommon Wisdom Daily, we’re all about the financial, economic and/or investment angle of the story. And here’s where Snapchat gets interesting.

On Thursday, Snap Inc., the company that makes Snapchat, announced the terms for its IPO.

According to the company’s official IPO filing, as reported in Bloomberg, Snap will offer 200 million shares for $14 to $16 apiece.

That would put the tech company’s market value at $16.2 billion to $18.5 billion, based on the total shares outstanding after the offering.

Now, $18.5 billion at the high end might seem like a lot of value for a company that makes a disappearing message app. But consider that this value is much lower than the company originally anticipated.

Per Bloomberg:

In November, the company was eyeing a market value of $20 billion to $25 billion, a person familiar with the matter said at the time. A month earlier, that range was closer to $25 billion to $35 billion, people familiar with the matter said, with one suggesting it could be as much as $40 billion.

It looks to me like the market value of Snap is disappearing with every passing month.

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For Wall Street, and for investors like us who are always tuned in to the trends in the market, the question is one of comparison.

Perhaps Reuters said it best in an article about which way Snap Inc.’s IPO could turn out:

Investors have been poring over the filing for Snap’s upcoming IPO to assess whether the still-unprofitable company will be the next Facebook Inc. (FB), which has figured out how to make money from its social media platform, or if it will be more like Twitter Inc. (TWTR), which is struggling to achieve the same goal.

If Snap is the next Facebook, it will be a powerhouse advertising draw that becomes a go-to place for online marketers … and for social media advertising dollars.

This also means it will be a darling stock that captures the smart money. Note the five-year gain in FB shares of nearly 250% …

If it’s the next Twitter, then it will face user-growth headwinds, struggle to monetize its user base, and fail to ignite the interest of big money investors.

It also means investors could be staring at another stock with a four-year decline of 61%.

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Early signs for Snap make it look more like Twitter than Facebook.

Snapchat’s new user growth has already started to slow. The “new active user” metric was essentially flat in the early part of Q4 2016, according to the IPO filing.

As Yann Magnan, managing director at Duff & Phelps, told Reuters:

“Snap is already demonstrating decelerating growth before they have managed to break even.”

The future of Snap Inc., which will trade on the NYSE under the ticker SNAP, will soon begin.

The company is expected to price its IPO after the market closes on March 1.

In the meantime, I’ll leave you with this …

Warren Buffett says “Never invest in a business you cannot understand.” In this case, we’re still learning what the technology and the company are capable of.

That doesn’t mean Snapchat may not be worth some of your investment dollars in time. But for now, the best move may be to see what the market thinks this stock is really worth, before we decide whether it’s overvalued or an opportunity to snap up a value before it disappears.

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If you would like to comment on this issue, or any of the issues we cover in the Afternoon Edition, all you have to do is leave me a comment on our website or send me an e-mail.

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The three broader-market indices snapped their simultaneous five-day win streak that was sparked by word of a “big league” tax plan coming soon from Capitol Hill.

Now, with President Trump seemingly sidetracked by Michael Flynn’s resignation as national security adviser, Andy Pudzer’s withdrawal of his labor secretary nomination and word that an Obamacare overhaul may arrive sooner any possible tax reform, the markets showed their frustration.

The Dow Industrials eked out a small gain that extended its win streak to six days. But the S&P 500 and Nasdaq, weighed down by energy and financials, closed just off their record highs.

• 43: That’s how many trading sessions the S&P 500 has gone without an intraday move of 1% or more. (LPL Financial)

• OPEC might extend its production-cut deal past June, if supply levels don’t drop sufficiently by the summer. The major producers and Russia are reportedly 90% compliant with their plan to help reduce the world oil glut and boost prices. WTI crude gained 0.5% today.

• Investors seemed to sweeten on gold, which notched back-to-back gains Wednesday and Thursday (after four days of losses). The yellow metal closed today at a three-month high of $1,241.60, up 0.7%.

• Not even news that the Senate voted to repeal an Obama-era gun regulation could help Cabela’s (CAB), which fell 4.8% after reporting earnings that missed on both the top and bottom lines. Net income fell 26.3%, with the company citing bigger per-person purchases that just couldn’t offset a smaller number of transactions.

• Maybe Buffett should have bought KLM? Warren Buffett boosted his airline holdings to $8 billion in the fourth quarter, padding his positions in American, Delta, Southwest and United. However, it’s Air France-KLM (AFLYY) that was soaring today. The Paris-based carrier’s stock gained 11.8% after earnings — its best day in a year — after reporting that its operating income surged 34% in 2016.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “What’s Snapchat, and Why is it Valued at $18.5 Billion?”

  1. If Carlos Danger, alias Anthony Wiener, had used Snapchat, he could have avoided a world of hurt. However, in doing so, he would have deprived the American people of a world of entertainment.

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