Snapchat Reveals Profits

This past Thursday, Snap Inc published its initial public offering filing. Snapchat’s parent company filed the paperwork this past November and is seeking a valuation of $20 billion to $25 billion, despite a Bloomberg report several months ago that valued Snap at $40 billion. Morgan Stanley and Goldman Sachs will head the deal, which could make CEO Evan Spiegel wealthier than many Fortune 500 CEOs. Spiegel and several of his friends from Stanford created Snapchat in 2011 as a private photo-sharing application, but the functionality of the application continues to expand over time. In the three years from 2011 to 2014, the app saw an increase in daily active users from one million to 100 million. While the daily user count continues to expand, the rate of growth has slowed down significantly in recent months. This number increased by only 7 million during the last three months, less than it had in most quarters.

Despite its growing user base, Snap mentioned in its filing that it may never become profitable. This risk factor caused many business journalists to criticize the social media platform in the past few days due to speculation over its potential viability against longer-established companies like Facebook, Instagram, and Twitter. The company brought in $404.5 million in revenue in 2016, while losses increased from $372.9 million in 2015 to $514.6 million in 2016. This increase in losses correlates with the growing daily user base that creates extra costs associated with hosting all the pictures, videos and messages running through the app’s servers. Snap currently makes its money from selling advertising space that companies can buy to promote movies and products on the filters and lenses available for users to implement into their pictures and videos. Short advertisement clips also play after consumers view certain pictures or videos, and the company’s filing shows potential for the growth in mobile advertising around the world, especially as internet infrastructure improves in developing countries.

The company is looking to expand its revenue sources with the introduction of Spectacles, sunglasses with a camera that allows users to save images and videos as “Memories” on the Snapchat app. Introduction of this product beyond the mobile app helps Spiegel reposition Snap Inc as a camera manufacturer and not just a social media platform. The camera glasses were sold in limited quantities during the last few months of 2016, creating new hype for the future of the product and company innovations in the future. Despite this excitement, expansion into new markets will result in more losses and feed the doubters that question the future profitability of the company.

Sources:

http://www.businessinsider.com/snapchat-parent-company-snap-inc-files-for-ipo-2016-11

http://fortune.com/2017/02/04/snapchat-abridged-history/

http://www.telegraph.co.uk/technology/2017/02/03/snap-ipo-can-snapchat-lose-515-million-worth-25-billion/

16 thoughts on “Snapchat Reveals Profits

  1. Were the Spectacles received well? It seems like gimmicks like the Spectacles never impact the market the way producers anticipate-just based on personal experience, I don’t believe I know anyone that would actively use such a product.

  2. I think it is important to note that many investors may be hesitant to buy Snapchat’s stock when it goes public because the market for social media is very risky. A form of social media that is popular today may be surpassed by competitors in the future which can be seen with previously dominant social media sites like MySpace. Since you mentioned in your article that Snapchat is currently experiencing a slow down of growth, do you think that the company’s stock may not be as successful as the owner’s previously thought?

  3. When facebook had their IPO, many wrote them off as a worthless stock and their share price had an overall negative drop over the first couple years. The stock price has since risen every year since the end of 2013. It’s possible to see a similar trajectory for Snapchat, however Facebook’s opportunities for advertising and profits seems much wider than Snapchat’s.

  4. I want to know how much of their costs go to R & D and how much goes to expanding their servers to be able to host more users. I can’t imagine that the overwhelming majority go to the latter or even really a majority at all. If that were the case, then it is almost certainly impossible for them to ever become profitable and they likely wouldn’t have even made it this far. I have to imagine that, like an Amazon or Tesla, their profits are being weighed down by a massive amount of spending in R & D in hopes that one day it will pay off and they will become extremely profitable.

  5. Snapchat’s advertising update from early 2016 no doubt resulted in a significant earnings jump. It will be interesting to see what similar innovations they intend to roll out going forward, the app’s model as is does not offer nearly as much as Facebook did at the time of its IPO. As users begin to get tired of the app in favor of new ones they will need to find a way to retain them.

  6. I think that Snapchat is a little too late on their IPO. Maybe a few years ago, an IPO would be well received, but for a company that appears to be offering little new innovation within its app, people would be foolish to invest.

  7. Snapchat is extremely popular with Milennials, but maybe they might experience a cash model problem similar to Twitter (Twitter has a hard time implementing cash revenues). Also, the spectacles are not that popular so far, and it will be interesting to See what CEO Spiegel has in mind for Snapchat’s future.

      • Google stopped selling Google Glass to individual customers in January 2015. It was considered a complete failure especially due to the negative social connotation Google Glass drew. People never knew if someone wearing the glass in public was taking a picture or video of them or not. The following article speculates how Snap’s spectacles might succeed where Google glass did not. It was an interesting read and I saw a few reasons to believe the spectacles might do well. First, they are being sold for $130 (Google Glass started at $1500) making them much more affordable to the mainstream consumer. Second, they light up when recording eliminating the uncertainty of people being creepy in public. Lastly, Snap has done a great job of hyping up the product by selling them in special vending machines in LA. However, given that Snap’s spectacles is such a niche product, I am uncertain on whether it will ever be huge revenue generator for Snap.

        https://www.fool.com/investing/2016/11/17/will-snapchat-spectacles-succeed-where-google-glas.aspx

  8. The advertising revenue model appears fragile. If Snapchat can demonstrate that it’s effective, and users don’t flee as ads become pervasive…both empirical questions…then Snapchat may have a future.

    It would be most useful to compare to Chinese companies that had no access to venture capital and little access to advertising. Yet they’ve grown. What is their business model? How do they make money (and they do appear to make money)?

  9. A product like Spectacles sounds like it would have a better chance of selling than Google Glass. Glass really seemed like it was trying to be a smart phone on your face, whereas Spectacles is really photo-focused. It still might flop the same, but products like this outside of strictly app services are probably going to be important if Snap is to grow. More users bring more costs and while the app certainly has considerable space for advertising, it does not have as much as other platforms. Having a product to sell would be a huge help in overcoming the more user, more costs challenge.

  10. As a Snapchat user myself, I can see the difficulty of making money using their business model. The only time I encounter advertisements are when I look at other peoples’ stories that they post up for a timespan of 24 hours for all their friends to see before it disappears. However, these adds can easily be avoided as all one has to do is tap the screen and it goes away. What’s the point of a company paying to advertise on Snapchat when it has very limited and restricted advertisement time?

    Snapchat needs to revolutionize their advertising strategies if they aim to make a profit in the future. I think the idea of advertisements in the app has enormous potential, and the presence of news stations offers a unique way for individuals to receive news in small blurbs. Thus, a great product exists, but the company must improve the coordination between advertising and their product’s features moving forward.

    • Useful, as I’ve never used Snapchat, and limit my twitter activity to sending out a note when I post a new blog at autosandeconomics.blogspot.com. I never actually read things on twitter, email keeps me quite busy enough. So I have little sense of what room there is for advertising. If you’re reading 140 characters, or items that will self-delete, then it strikes me as a fundamentally unfriendly environment for a would-be advertiser. As a non-user I don’t how you would put ads into a cell phone twitter or snapchat stream without being so intrusive as to drive away users, defeating the whole purpose.

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