The internet is abuzz with IPO fever on the news that Snapchat might make its public debut in March for $25 billion. But can it justify its valuation?
Investors should be wary. The history of tech IPOs is filled with successes but also failures.
If you had invested in Facebook's IPO in May 2012 for about $38 you would have watched it hit $19 by August. Investors who could stomach the 50% drop then watched as Facebook's stock climbed as high as $132 this past October, a 247% return on the initial investment.
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Conversely, if you invested in Twitter's IPO in Nov. 2013 for $41.65 you would have watched it launch up to $69 by the end of the year and then fall $30 by May 2014. Currently the stock trades at about $19, a loss of 54% since the IPO.
Snapchat is a mobile application where messages and photos are permanently erased 10 seconds after being opened. The app's initial claim to fame was as a platform for teens to communicate (including sexting) without evidence to regret down the road.
Over the last two decades Wall Street has seen more of these tech companies with massive user bases generating lofty valuations based almost entirely upon future projections. The assumption is that if you have a lot of users you can charge advertisers a lot to get access to those users. But the reality has often been different.
Snapchat's ad space isn't as in-your-face as Facebook's but it does have a dedicated page full of ads that users must interact with to see certain content. That ad space is full of big brands, including the NFL, Cosmopolitan, MTV, CNN, National Geographic and a dozen other brands targeting millennials.