What’s an IPO and What Going On With Snapchat?

by Amber Berry on March 13, 2017

What's an IPO

Snapchat is a popular social media mobile application. For those unfamiliar with it, the signature feature of Snapchat is the disappearing messages you can send to your friends. You can send pictures, videos, and even text messages that expire after a time limit the sender sets. They also offered the opportunity to create a Snapchat story. Where all of your videos and images will be available for 24 hours. Over the past few years, Snapchat has grown in popularity. As they expanded their features, it became a way for influencers to connect with their followers. Recently, Snapchat became a publicly traded company and there are some very interesting discussions about it. Before diving in, let’s discuss what it means to be a publicly traded company.

What’s an IPO?

An IPO, or initial public offering, is the first time that a company is available to public investors.

When a company is ready to grow and expand, one way to do that is through fundraising. Typically, we think of fundraising efforts like bake sales, lemonade stands, and raffles. But in the case of a growing business, it looks bit different. Instead of selling tangible objects, a company will sell part ownership of their company in the form of shares.

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The number of shares and the price of shares sold are heavily determined by the value of a company. The value is somewhat arbitrary because it depends on so many factors. One major factor is the supply and demand of the product or service a company offers when the IPO happens. If the market is competitive and the demand is high, the valuation will be set higher.

Why do people care about IPOs?

When an investor has an opportunity to purchase shares of a company, and they expect the company to grow it is an opportunity to turn a profit. If the company successfully is able to grow and increase in value due to demand or other factors, the price of the shares increase. Profits come to investors for a couple of different reasons. A company pays its investors dividends when they have excess earnings and doing well. Alternatively, if the share price increases the investor can sell them off for a profit.

However, there is no guarantee that a company will grow and increase in value. This is why it is so important to understand the risks associated with investing. And one way to understand the risks is to thoroughly research a company before investing. Many people don’t fully understand the risks they’re taking and that’s when investing can be stressful and messy. Calculated risks are completely fine, though!

What is important about the Snapchat IPO?

Snapchat’s recent IPO had some interesting results. They hit the market as the biggest IPO since 2014 according to MarketWatch. The company is currently hovering around a massive $24 billion dollars. What really deserves attention is the company’s financial situation.

Their financial statements indicate that Snapchat has very little debt and their liquid assets are around $1.5 billion dollars. (Forbes) Which is a great place for a company to be! However, the company is valued at $24 billion and the answer for how to bridge that gap is unclear.

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The past two years have not been profitable for them. While their revenues increased last year, their net losses increased as well. Snapchat reported net losses of $372 million in 2015 and over $500 million dollars in 2016. A majority of their revenue comes from advertisement sales. At this moment 98% of their revenue is coming from advertisements, and how they plan to create and scale other revenue streams has not been released. This means that is it difficult to project the growth of the company over the next few years.

Additionally, the competition in the social media niche with Instagram and Facebook is fierce. As the price of the Snapchat stock fluctuates, it reflects the curious foundation that the company is built upon.

What does this all mean?

Despite all of the hype, it is really important to evaluate the whole story when it comes to buying shares, whether or not they are part of an IPO. The current price is just a piece of the puzzle. It’s about the future of the company and its plan for growth. While investing is risky, calculated and researched risks can be worth it.

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Amber Berry is a millennial who shares her passion for personal finance through her website, feelgoodfinances.com. As a Certified Financial Education Instructor, Certified Money Coach and writer, she enjoys working with women and young adults to help them transform their relationships with money through education and compassion. She enjoys contributing to various online media outlets and staying caught up with the latest personal finance publications.

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