Snap: something apart from its valuation

Snap: something apart from its valuation

One of the biggest events of the week is definitely the IPO of Snap, the mother company of Snapchat, the mobile application that went viral in the world of teens, share price of the corporation skyrocketed, with an astonishing 50% increase in market value within one trading day. The hysteria of the market has extended to the second trading day, causing Snap to experience another 10% surge in price. The berserk hike in market value has raised concerns about the true underlying value of the company, with famous financial columnists arguing that Snap doesn’t worth that much. Anyhow, the aim of this article isn’t to judge whether Snap deserves such a high price-to-sales ratio, but rather attempting to view the company in a rather different perspective, comparing with commentary made that only focus on the performance of Snap Inc in the stock market.

So, before expressing my opinions, I would love to briefly mention how Snap Inc position themselves. Apparently, the change of the corporation’s name implies thoughts of the management of the company: from Snapchat to simply Snap, the founder of Snap deems the tech giant to be a futuristic camera company. I do agree that Snap should proceed transforming themselves into an authentic camera company. After all, the only hardware product launched is Spectacles. Though the fancy sunglasses with embedded tiny camera is priced at $130, according to the prospectus of Snap, the project is in fact under financial deficit. In my point of view, being a software company specialized in developing one of the best instant messaging mobile applications, the company doesn’t have much experts that possess the ability of creating great hardware products, meanwhile, considering the fabrication cost of their new products. With the slowing growth of active users, predominantly because Instagram and Whatsapp have been mimicking the features of Snapchat, one of the ways to expand the business is to enter the camera market.

Of course, there is always another method to increase revenue. The operating cost of Snap Inc is expected to rise in the near future, since Snapchat has to utilize services offered by cloud solution providers like Google or Amazon, so as to meet the demand of their users’ massive number of daily data transfer. In order to cover the cost and try to be a profitable company, Snap may try to duplicate what Twitter has done. According to Twitter’s shareholder letter, they have a segment named “Data licensing and other activities”. By selling users’ data, like how they use Snapchat, to other companies, this may potentially provide a steady source of return to Snap Inc. In fact, I believe the management realized this opportunity. In November 2015, Snap announced an update in privacy policy, proclaiming that they have rights to use users’ data, including those pictures you have uploaded or even deleted. Though the act outraged some users, it opens the door of a lucrative business for the company. In the long run, Snap should consider various ways to diversify its business. Perhaps, the young corporation will once again shock most of us with innovative ideas, just like how they have invented Snapchat.