Snapchat is going public: Why you should hesitate to invest

Snapchat CEO Evan Spiegel poses for a photo in Los Angeles. Snap Inc., owner of the ephemeral message service Snapchat, seeks to raise up to $3 billion in an initial public offering. According to IPO documents filed on Thursday, Feb. 2, 2017, Snap has lost nearly $1 billion in the past two years. (Jae C. Hong/AP)

Social media/messaging service Snapchat, which took the world by storm, is officially going public. In a move made on Feb. 2, parent company Snap Inc. filed with the SEC for listing on the stock market. Officially filing as a camera company, they are seeking a valuation of $25 billion.

Snapchat started off as a picture messaging service and has developed into much more. Now, its classification is more fuzzy after having partnered with various tabloids and television stations to bring users abbreviated “news” snippets and quizzes about what their dinner says about their sex life. In one update, Snapchat now allows users to submit videos of them having fun at major events as a kind of crowd-source entertainment which does nothing but make everyone else feel depressed about their boring lives.

But Snap Inc. is not happy with just staying in the digital world. Last year, with the release of Snap Spectacles, they have officially broadened to the tech and camera genre. Costing a pretty $130 a pair, we can be sure to see more inventions like this coming from the company in the future. It is not all peaches and cream, though: there is a darker side to the company, which is why Snap Inc.’s IPO is so outrageous and a bad idea for any smart investor.

Revenues for the parent company were $404.5 million in 2016, a rise of around 600 percent from 2015. This is nowhere near their $25 billion validation mark the company hopes to achieve. In fact, in a price-to-sale comparison done by Fortune, Snapchat is asking for a valuation 61.7 times higher than its sales. Comparatively, Facebook, its closest competition, has a price-to-sale multiplier of only 12.6. Snapchat is over-valuing themselves at off-the-chart numbers. Just for more comparison, Yahoo’s price-to-sale comparison is 6.8, Google’s is 5.2, Yelp’s is 4.3 and Twitter’s is 4.2.

With a limited history and only a fraction of the sales of other tech giants—Facebook recorded $27.6 billion in profit last year—there is no real reason why Snap Inc. should be so highly valued, especially since the valuation means that each stock will also be priced very highly, causing investors to hold heavy risk on their investments if they decide to buy.

Included in the filing with the SEC is a 30-page list of risks to investors that Snap Inc. foresees as possibilities if they go public. Some things that stuck out to Jared Blikre of Yahoo Finance were Snap’s target audience and reliance on Google.

Listed by the company itself, its target consumer ranges from age 13 to 34. This is problematic because historically, consumers in this age are volatile with their interests and what is hip today might be dead in a week.

The other piece of troubling information contained in the 30-pages of risks is the need for Snap Inc. to rent out a portion of Google’s cloud storage. Because there are so many Snapchat users and data being exchanged, the only place that much data can be stored is through Google. This will cost Snap Inc. a reported $2 billion over the next five years, which is particularly alarming when their current earnings barely cover that.

Combine this with the admittance that stock holders will have almost no voice in the company, but CEO Evan Spiegel will have near complete control, and you have an IPO that poses too many risks for even the riskiest investor.

If none of these risks existed, investing in internet companies is still notoriously risky as there is nothing of substance keeping the company in business. Apple will always have its phones, but what will Snapchat have if all of its users decide to hold their finger over the yellow-and-white ghost icon app icons for a little bit too long? What happened to Yik Yak, Vine and debatably Twitter when users got tired and left?


Social media companies have a hard time reattracting lost users unless they choose to completely reinvent themselves. A company unable to adapt to the times is a company that will eventually fail. Let’s just hope you don’t hold any stock when it eventually does.


David Csordas is a campus correspondent for The Daily Campus. He can be reached via email at david.csordas@uconn.edu.