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Sandro Rosell
FC Barcelona President
Tuesday, October 24, 2017

Shares of Snap Inc, parent company to Snapchat, surged an impressive 44% on its first day of trading after its IPO. Snap Inc, priced its initial public offering at $17 per share, slightly higher than the expected range of $14 to $16 per share. Trading then began at $24, reached a peak of $26.05, and closed at $24.48. The bulk of the first day’s profits were enjoyed by the large investors who got in early.

Snap offered 200 million Class A shares, which do not include voting rights. The company, not wishing to dilute its power in decision making, has set up a three tier share structure. Class B shares carry one vote for each share. Founders Evan Spigel and Bobby Murphy will have the maximum voting rights with ownership of Class C shares, which carry 10 votes for each share. 

The overall optimism on Wall Street since the election of President Donald Trump has certainly been a contributing factor to the success of the IPO. Over the last three months, the Dow Jones is up 9.6%, the NASDAQ composite is up 11.5% and the S&P 500 gained 8.7%. Recently, the Dow Jones crossed the 21,000 threshold for a new milestone.

In comparison to similar past IPOs, Twitter Inc made a splash on its first day with reports of 73% gain. Alibaba was up 38% on the day of its IPO. Yet other successful stocks such as Facebook Inc had a modest first day with only a 0.61% increase. Despite that lackluster debut, Facebook’s share price has risen 260.26% over the past five years, while the Internet Services industry overall gained 153.47%, as per Zacks.

Snapchat is a social media messaging service popular among teens and millennials, boasting more than 158 million active users daily. The figures are particularly desirable to advertisers because this is the demography most likely to shop online. Still this strength is also a source of vulnerability for the company. Since the company’s only source of revenue is advertising, which started in 2016, and the demographics are so specific, investors may fear instability in that teens are inclined to suddenly change their preferences. 

Further, as far as Snap’s financials, company revenue is growing, but so are company losses. In 2016, while Snap’s revenues grew to $404.5 million, or nearly six times that of 2015, net loss for the year increased 38% to $514.6 million. Also Notable is that, Snap’s valuation is more than 60 times its revenue. User growth is also slowing down, whereas competitors such as Instagram and Facebook continue to report robust growth. 

It remains to be seen if Snap’s success story will be fleeting, or if its management team will be able to diversify its revenue base and create lasting value.

By Hadassa Kalatizadeh