A Cold Snap on Wall Street

By Andrew Billiter

In the latest example of a pattern previously seen with the IPOs of Twitter and Facebook, the share price for Snap Inc., the parent company of Snapchat, fell below its opening price of $24 on the first day of public trading, three days after the company’s IPO. While the stock enjoyed robust gains before opening to the public, the sudden nosedive reflects growing unease with the company’s inability to post a profit and concerns about future growth prospects.

Few things seem to disturb the stock market as much as brushes with reality, and the cracks are starting to show in a company that has posted a net loss since its inception, yet was valued at $28 billion dollars. In an interview with Bloomberg, Needham & Co. Senior Analyst Laura Martin estimated that Snapchat already has 50% market penetration in the United States, limiting the potential for growth and requiring more advertisements per person to generate revenue. As with Twitter and Facebook, the potential for directly targeting the coveted 13-34 demographic, rather than any actual underlying value, led to feverish anticipation and sky-high valuations, and some investors are jumping ship amid the growing realization that the company has not successfully integrated advertising into its business model.

Meanwhile, lead competitor Instagram has successfully co-opted one of Snapchat’s key features, the 24-hour long Snapchat Story, and seems to have mastered the monetization and engagement strategies that currently elude Snapchat. Buoyed by a large preexisting Instagram userbase, Instagram Stories hit 150 million daily users just 25 weeks after launch, roughly equivalent to the entire Snapchat userbase. Hospitality companies were among the first to realize the potential of Instagram Stories, teaming up with popular travel accounts to provide viewers with virtual excursions on their properties. The results have been impressive, connecting hotels and resorts with viewers in a more personal way and in far greater numbers than would be feasible with traditional methods. The greatest success story, the “Beautiful Destinations” Instagram account, partnered early on with companies such as Hilton Worldwide Holdings and Marriott International and now averages 5 million views per Story.

More than a year before Snapchat’s IPO, a CBR article in Fall 2015 reflected concern about the company’s inflated valuation. At the time, the estimated valuation was $16 billion. Now, $12 billion higher and an IPO later, Snapchat may be in the first stages of a bubble. Whether the stock will perform like Facebook and slowly, shakily find its legs or perform like Twitter and fall into a death spiral is unclear, but a renewed advertising and growth strategy is needed before the company’s value disappears as quickly as one of its messages.