Snap, Crackle & Pop: $28B IPO Stokes 'Bubble' Fears

For anyone over the age of 30, it is hard to understand the appeal of SnapChat, a social networking site from which photos disappear soon after posting. But that didn't stop investors from piling into Snap, the parent company, on the occasion of its initial public offering yesterday. Expectations were that Snap could end up valued at anything between $20 billion and $25 billion. At close of business yesterday, Snap was worth about $28 billion. But following another boost in morning trading today, its market capitalization is now almost $32 billion.

To put that in perspective, telecom equipment giant Nokia Corp. (NYSE: NOK) is currently worth about $30 billion on the New York Stock Exchange. Yet, for all its problems with growth and profitability, Nokia generated about €23.6 billion ($24.9 billion) in sales last year. Snap's revenues in 2016 were a paltry $404.5 million. And while that was nearly seven times more than in 2015, Snap's losses have also ballooned, rising from $373 million to $514 million over the same period. The word "bubble" springs to mind. (See Snapchat's IPO Filing Reveals $500M Loss.)

If Snap were to pop, it would not be the first tech-sector darling in the present era to end up as a big disappointment. Shares in Twitter, which similarly offers users a form of instant digital gratification, have lost 18% of their value over the last year, valuing the company at around $11 billion today. Following the loss of several senior employees, questions are growing about its very future, even though it was once seen as a tech giant in the making.

Snap's backers obviously insist there are key differences and that SnapChat can become a viable alternative to Facebook, the daddy of the social networking sector, among youngsters craving an outlet for user-generated video content. Customer numbers have risen to more than 150 million and site traffic stands at about 2.5 billion messages per day. That is turning the head of many an advertiser.

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But Snap's business model looks precarious. For one thing, the rate of customer growth has slowed, the company acknowledged in papers filed ahead of its IPO. Teenagers are by their very nature capricious and could easily drop SnapChat for an even younger and trendier service that might turn up. This is not at all the same as the situation regarding Facebook, whose much longer-established service now caters to more than 1 billion users. Many of those have grown used to relying on Facebook as a kind of digital "archive," entrusting the site with family photos and other personal information, as well as for its network effects.

While Snap is expanding into new areas, it still offers fewer site features than Facebook, limiting its value to advertisers. Facebook, in the meantime, appears to be working hard to add SnapChat-like elements to its own service, evidently regarding the upstart as a potential threat. With a stock market valuation of about $393 billion, and resources to boot, Facebook will be tough to beat if a service innovation battle starts between the two firms.

Then there is the spending power of the typical SnapChat user. Advertisers like their promotions to be seen by people with money. Most youngsters, quite frankly, have none. Your correspondent's 13-year-old son -- an avid user of SnapChat and several apps that generate revenues from "in-app purchases" -- is reduced to putting in the occasional request to his parents for an injection of online funding, typically used to buy some virtual weapons in Clash of Clans or another Internet game. Such parental largesse is not always forthcoming.

All that said, other Internet companies have defied their original naysayers to succeed, including Facebook itself. It is hard to see it disappearing now, even if emerging social networking rivals can carve out opportunities in select areas. It will be interesting to see what effect Snap's IPO has on broader market sentiment, with several other technology players weighing their IPO options. Conditions still look far saner than at the start of the millennium, when the original dotcom bubble was about to burst. But a spate of listings that go the same way as Snap's, despite similar doubts about the underlying business model, would bring back some nasty memories.

— Iain Morris, , News Editor, Light Reading