So how can Snapchat be worth over $20 billion?

Snap Inc, the parent company behind the disappearing images app Snapchat, has just floated on the New York Stock Exchange at $21.44 per share valuing the company at around $20 billion (yes, billion, not million dollars), making the founders Evan Spiegel and Bobby Murphy multi-billionaires. Not bad when you are not yet thirty.

Snap Inc’s shares jumped over 40% in early trading at the beginning of March, valuing the company at some $28 billion but a week later after some profit-taking by investors, dropped back 10%. So what, you might say, but Snapchat despite having 160 million daily users managed to lose $372 million in 2015 and over $500 million in 2016. Its trading loss 2016 was even more than its turnover, which takes some doing. It has never made a profit.To put Snapchat’s valuation into perspective, the company is now valued at more than the combined market valuations of established (and profitable) retailers Next, and Sainsbury’s. Is this all social media hype or will Snapchat become the “new” Facebook, currently valued at $393 billion, three times its valuation when it first became a public company in 2012. Snapchat has a long way to go – Facebook’s turnover in 2016 was $28 billion, some 70 times those of the “upstart” Snapchat.

Optimists will argue that share valuations are all about future, not past, profitability but, of course, the future is uncertain and Snapchat, which is only accessible by mobile phone, faces many challenges to justify such a massive valuation. When Twitter floated in 2013, it projected massive growth and plans to sell adverts to its large user base but three years on it is deep in the red and its share price has collapsed.

Snapchat’s unique selling proposition is that it is seen as “cool” and having 160 million daily users, up 48% on the previous year, is certainly impressive. But can Snapchat turn this mainly young and perhaps fickle audience into profitable customers generating substantial advertising revenue as successfully as the now-mainstream players, Google and Facebook? Can it compete with and emulate these big boys who have very deep pockets – particularly its more direct competitor Facebook, who own both Instagram and WhatsApp – or will it end up like the now-forgotten MySpace and Tumblr?

Only time will tell.

Paul Hammett BA, FCMA, FCMI, PGCHPE

Senior Lecturer

School of Business, Leadership and Economics at Staffordshire University

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