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Snap Back to Reality: the rise and fall of Snap Inc. stock

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It all started with a bang.

 

Snap Inc. stocks up more than 40% on the first day of trading. The largest US IPO since 2014 with a value of $24 billion. Analysts drawing comparisons to the likes of Amazon, Netflix and Facebook.

Yet five months down the line, the hype surrounding Snap Inc. has fizzled out. The value of its stock has fallen below the company’s $17 public offering price.

The drama of such an unexpected plunge for a company whose flagship product – mobile app Snapchat – invades all facets of everyday life has left many wondering what has gone wrong.

Caused stocks to plummet 20% in one day after Snap reported that user growth was slowing…

The app itself still seems as popular as ever. Indeed, the recent introduction of ‘Snap Map’ and the potential success of Snap Spectacles tells us that Snap Inc. is continuing to innovate successfully.

But behind the scenes, things seem much less promising, and investors have caught wind of this.

One too many stories

It was no secret that Snap was, and still is, far from becoming profitable. However, potential threats from lurking competitors that initially worried investors have come to fruition recently.

The launching of both Facebook and Instagram stories – virtual copies of Snapchat Stories – has hampered Snap’s growth prospects. It was evidence of this, released by the company in May, that caused stocks to plummet 20% in one day after Snap reported that user growth was slowing.

This, combined with reports that average revenue per user actually declined in the second quarter, is what has caused Snap’s value to shrink dramatically.

Facebook’s stock suffered a similar experience in its first few months of trading, falling 60% from its IPO peak, but has now increased by over 700% since…

Now what?

So how can Snap turn things around? Or perhaps it’s more appropriate to ask; can Snap turn things around?

You’d be forgiven for forgetting that Facebook’s stock suffered a similar experience in its first few months of trading, falling 60% from its IPO peak, but has now increased by over 700% since.

There are of course significant differences between Facebook and Snap, and you certainly shouldn’t expect Snap to turn into the next Facebook – it was such a comparison that continually hampered Twitter’s growth in its early years. Yet, like all the tech giants of today, Snap faces similar challenges if it’s to become a successful company.

Snap out of it

The secret lies not only in continual user growth, but mainly in the shift towards digital advertising. Undeniably we are gazing much more at our smartphones and much less at traditional media, such as televisions or newspapers, and advertisers have naturally followed.

Now Netflix is worth over $90 billion and spends $6 billion a year on producing its own content…

This new digital advertising trend has already cemented both Google’s and Facebook’s places at the top of the tech ladder. But advertising revenue can also benefit other tech companies like Twitter and Snap providing that they continue to attract large amounts of people to their platforms. In this sense, the continuation of Snap’s successful product innovation is the question investors must ask themselves when considering purchasing its stock.

Perhaps then, the best comparison that can be made to help us predict Snap’s future is with Netflix. In 1997, Netflix sent you DVDs and you sent them back once you were finished with them, like some sort of postal-rental film service. But now Netflix is worth over $90 billion and spends $6 billion a year on producing its own content – it’s continually innovating.

Stocks jumped 3% when Snap announced it had struck a deal with Time Warner…

Once more, like Netflix, and unlike Facebook, Twitter and Instagram, Snapchat doesn’t claim to be a social media platform and instead is a company that has the potential to produce its own content.

Only last month stocks jumped 3% when Snap announced it had struck a deal with Time Warner to produce new made-for-Snapchat shows. Similarly, this week Snap announced it was partnering with NBC news to produce a twice-daily newscast whilst rumours are spreading over Snap collaborating with MTV and other brands and platforms that are popular with millennials.

The future for Snap hangs very much in the balance for now. If it can continue to draw in users and advertisers through successful product innovation, Snap’s prospects look promising despite its disastrous performance since going public.

 

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