Prior to Snapchat’s initial public offering (IPO), the shares of this popular social media company were priced at $17 each. This valued the company at $20 billion. In the first days of trading, the shares went up more than 20%, bringing the market capitalization to over $30 billion. According to a recent Forbes article, there are several reasons why it may not be a good buy.
First of all, growth is slowing. So Snapchat may not grow enough to justify its hefty market valuation. This company also doesn’t appeal to everyone. While millennials and kids love it, it is not so popular among older generations. Another reason is that this company is losing lots of money. Last year, it has lost over $500 million. And the present valuation is over 21 times Snapchat’s 2017 revenues.
Then, investors get no voting power. The founders control most of it. Yet another reason that should worry investors is that Snapchat’s ideas are copied by other social media giants. Facebook has introduced video-reel on its Instagram product. This is similar to Snap’s stories. Finally, initial investors are locked for six months from selling the shares, so once that period expires, they may rush to unload.
At this point, nothing is set in stone about how Snap’s shares will perform. Its market cap is less than 10% of Facebook’s, but is already more than that of Twitter. Analysts are worried that Snapchat’s stock price is more likely to follow Twitter’s and lose investors money rather than Facebook’s stock, which has been growing steadily. The conclusion is that buying Snapchat shares is very risky.