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Snapchat S-1 Deep Dive: Numbers Show Bumpy Road May Be Ahead

Snap Inc. officially filed for its estimated $4 billion IPO today with the release of its S-1.

The headline numbers for Snap look pretty good, with 160 million daily active users (much more than Twitter) and $404.5 million in revenue, which comes in well above its target of about $350 million for the year.

The average user also spends 25-30 minutes a day on Snapchat. While this number comes in lower than Facebook’s near-50 minute number, that’s not quite a fair comparison as Facebook’s number also includes any time spent on Messenger and Instagram. Compared to other single-platform competitors, Snap’s engagement numbers look pretty good.

The Elephant in the IPO

The bad news, however, is that Snap’s growth has been outstripped by its losses. The company had a net loss of $514.6 million in 2016, up from $372.9 million in 2015. For a tech company pre-IPO, these numbers aren’t surprising, and Snap’s S-1 comes with the almost standard tech IPO warning that the company isn’t profitable, may not be profitable for a long time, and in fact may never become profitable.

The next year will be telling for Snap’s revenue growth, as the company has set a revenue goal of $1 billion.

As I’ve written before, there’s good reason to think Snap will struggle to hit this number. It’s S-1 makes the outlook look even worse though, as Snap’s user growth actually slowed in the second half of last year compared to the first half.

snapchat s-1 IPO

Snapchat’s S-1 filing shows slowing user growth this year.

The elephant in the room for Snap is Instagram, which blatantly (and admittedly) copied Snapchat’s Stories platform in the latter half of the year. Instagram’s Stories platform has been wildly successful, reaching 150 million daily active users within its first six months since its August launch. Snapchat’s diminished engagement is likely a result.

In its S-1, Snap attributes its slowed growth in part to “increased competition.” Snap would likely argue that this slower growth is a blip rather than a trend. But there’s significant reason to think that this take is wrong. Instagram’s Stories could well surpass Snapchat in active users by the middle of the year, and Facebook is already testing similar, Story-like features for its Messenger and Facebook platforms.

Is Snap the Next Twitter? Or Can It Continue to Grow?

For a company like Snap that’s trying to sell a growth story to Wall Street, slowing user growth this early in its life is not a good sign. This fact will inevitably invite unfavorable comparisons to Twitter, which failed to keep up its once-stellar growth rate after it went public.

After its IPO, Twitter managed to grow revenue and average revenue per user significantly over the next few years. But to investors that growth mattered little.

They focused instead on Twitter’s almost complete lack of user growth, with the platform’s network essentially stalling out at just above 300 million monthly active users.

Additionally, as The Information reported (paywall) this week, the first year after going public is often a tough one for platform companies. Even Facebook declined significantly in its first year before its performance and stock price rebounded. (Today, Facebook is up about 250% from its IPO price.) In contrast, Twitter is currently down more than 60% from its IPO price, with no sign of recovering any time soon.

The one big leg up Snap has on Twitter is its ad format. Video ads will be much more attractive to advertisers than Twitter’s embedded tweets, and video ads typically go for much higher rates per view. Snap also has a much larger US-based audience than most of its content platform competitors, with 60 million daily US users. And it finally moved its automated ad exchange (think Google Adwords but for Snapchat video ads) out of beta earlier this week.

Largely for these reasons, Snap’s average revenue per user looks very good for a company pre-IPO, at $2.60 per user. By comparison, the average across Facebook’s more mature ecosystem of platforms was $4 per daily user in 2016.

Ultimately though, Snap’s post IPO success will come down to whether or not it can continue to grow its network.

Snap’s S-1 numbers, and the specter of increased competition from Facebook and Instagram, will do nothing to assuage investor fears that it’s the next Twitter. For those reasons, Snap will likely be in for a rough ride post-IPO.

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