There's been talk of an impending IPO as soon as next year for Snapchat, the ephemeral social media company that recently was estimated to anticipate $1 billion in ad revenue in 2017 by forecasting firm eMarketer. This would represent a significant increase in revenue over the $366.7 million the company is estimated to take in for 2016. While there has been a lot of buzz about Snapchat, the $1 billion revenue prediction seems to be more hype than reality.
While there is no doubt that Snapchat has become a popular social media platform for millennials and those younger, it still falls far short of Facebook's (FB) - Get Report Instagram in overall users. Snapchat has over 150 million users, but Instagram has over 500 million users. For Snapchat to achieve $1 billion in ad revenue, it would require advertisers to begin to pull budgets away from Instagram and Facebook to achieve that sort of revenue potential and that seems unlikely.
Facebook and Instagram are the two most viable advertising options in the social media environment today. With their targeting and large user base, marketers report substantial return from their advertising dollars on these platforms. While Snapchat has a large and growing base, many advertisers have struggled to see true value from their advertising campaigns on Snapchat. While that notion doesn't mean that over time marketers won't see better returns from Snapchat, after all it took Facebook some time to get it right before marketers began to see return from their platform, however the reality right now is that money is better invested in advertising on Facebook and Instagram.
As far as Snapchat's $18 billion valuation, the question is whether or not it can follow Facebook in developing a legitimate ad platform that provides strong return for its advertisers, the kind which has led to Facebook's current $350 billion valuation with talk one day of a $1 trillion valuation, or will Snapchat follow the path of Twitter, which has struggled to find a true ad platform to generate value and has a current valuation of $10 billion while boasting over 313 million users.
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This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.