Snap Is Public. Will It Ever Be Profitable?

The question is whether Snap, having gone public in a blaze of long overdue internet (dare we say irrational) enthusiasm, is the next Facebook - or the next Twitter. Bitter experience informs us that user growth numbers will soon tell the tale. And the early returns aren't looking awesome...JL

Daniel Gross reports in Slate:

Fuddy-duddies expressed skepticism about the high valuations accorded Google and Facebook on their first days of trading.  For apps, website, and media companies, the test is whether increasingly large numbers of people use the product—and if the money follows. The potential user base these days is 7.5 billion. (For Snap) this could be the beginning of an epic stretch of value creation or the beginning of an epoch of disappointment.

Snap Inc., the parent company behind Snapchat, went public Thursday. The shares were priced at $17 and got a nice pop, starting trading at about $24, giving it a market capitalization of $33 billion. Which is an impressive start (Facebook was worth $100 billion when it went public).

This could be the beginning of an epic stretch of value creation or the beginning of an epoch of disappointment. Sentiment is split. As investors clamored to get in, Pivotal Research Group slapped an “early sell” rating on the stock, saying it’s only worth $10. The Snap IPO may not have a full-on fin de siècle feeling to it, but it definitely gives off a late-cycle aura. Part of it has to do with the late baroque, mannered stage of its contempt for public shareholders. The cheeky assertion that it’s a camera company. (Um, no. It’s a company that, for now, sells ads against text and video. Last month, I labeled Snap the Donald Trump of IPOs for its aggressive flouting of norms and shirking of accountability. Snap doesn’t make a profit, isn’t sure when it will, and the shares it sold Thursday don’t carry any voting power. Its CEO is emperor for life—and then some.

The inevitable pop culture response also indicates a certain toppiness. The good folks on CNBC posed Thursday morning in Snap spectacles—a product I’m pretty sure they don’t and won’t use and that nobody who watches the channel ever will. Then there’s Joel Stein’s cover story on Time, out (online) Thursday morning. I’ve long held it as an article of faith that when a business or economic phenomenon appears on the cover of a mass-circulation newsweekly, then it’s officially the top. (Unless I penned the story in question.)

Stein’s thesis is worth considering: Snap is an incredibly valuable phenomenon because it is the vehicle through which millions of people define themselves and is hence integral to the identities of its users.  The commercial possibilities inherent in such a product are endless. That’s undoubtedly true. I see it in my own household.

But these are teenagers and adolescents we’re talking about here. This is a demographic that

has been known to change its mind—just as they start spending real money and becoming more desirable to advertisers. (The Disney Channel alumni network is littered with a long list of people who were beloved by a teen audience but never made the leap to appreciation from a more mature audience. Remember Drake and Josh, or Miranda Cosgrove?) It’s entirely possible that, as they age and go to college and get jobs and have real human relationships and children of their own, today’s power Snap users may ultimately decide to stop spending their free time taking selfies and writing texts on them. Or they might switch to a more compelling, easier-to-use platform. (Hello, MySpace!)

Yes, yes, I know fuddy-duddies expressed skepticism about the high valuations accorded Google and Facebook on their first days of trading. And they were wrong. That’s because both companies matured and grew greatly as public companies—both in their reach and their ability to turn profits. Soon after its IPO, Facebook embarked on a pivot largely unparalleled in modern media history—from having essentially no mobile advertising to becoming a dominant player in the field in a remarkably short period of time.

Not every really popular social media platform can pull off such a transition at speed. Some platforms simply aren’t as sticky, or conducive to advertising and storytelling as people think. And not every platform can continue to put up impressive user growth numbers. In its most recent quarter, for example, Twitter reported that both revenue and user growth were largely flat.

In 2016, Snap’s expenses were more than twice its revenues. The company certainly has more room to grow. But in some respects, it resembles Twitter more closely than it does Facebook. Snap’s revenue grew 29 percent sequentially in the fourth quarter of 2016. That’s great for a company that just started to monetize. But it needs a higher rate of growth on its increasingly higher base if it hopes to make a profit.

The ultimate test of whether you are a lasting cultural phenomenon isn’t whether you get a Time cover, or if people on TV wear your silly glasses. For apps, website, and media companies, the test is whether increasingly large numbers of people use the product—and if the money follows. We know the potential user base for an app these days is 7.5 billion. Facebook has an astonishing 1.2 billion daily active users, and that number keeps growing significantly off this very high base.

But Snap’s Daily Active User base is far smaller than Facebook’s (and even Twitter’s). And in an ominous sign, it’s already showing signs of running into a Twitter-esque plateau. Snap went from zero users in 2011 to 147 million users in the second quarter of 2016. Remarkable. But in the third quarter of 2016, the number of daily active users had crept up to just 153 million, an increase of 6 million, or 4 percent. In the fourth quarter of 2016, a quarter Snap says is typically characterized by higher levels of activity, it added only 5 million daily active users, an increase of 3.3 percent. That’s perilously close to flatlining.