Snap’s Challenges to Gain Increased Focus in Public

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Snap’s Challenges to Gain Increased Focus in Public

After years of operating as a secretive startup, Snap Inc., parent company of ephemeral app Snapchat, is ready to make its debut on the public market. The Venice company, led by co-founders Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, unveiled its financials in an S-1 filing with the Securities and Exchange Commission last week, revealing that it plans to issue $3 billion worth of shares on the New York Stock Exchange.

Despite generating $405 million in revenue last year, a 586 percent jump from the year before, Snap reported that it lost $515 million in 2016, meaning the company is still operating at a substantial loss and dealing with stiff competition from Facebook Inc.’s Instagram Stories.

Much of Snap’s advertising model, which relies on selling Snapchat-tailored ads to brands, is still unproven at a large scale. Though it claims to have a whopping 158 million daily active users, many observers are waiting to see if Snap can evolve from a teenage phenomenon into a grown-up online advertising business that can increase earnings steadily enough on a quarterly basis to satisfy retail investors.

In light of its approaching IPO, here are five things to watch in Snap’s first year as a publicly traded company:

1. Older users.

“Snapchat has been in this cool sector for a long time,” said Mike Jones, chief executive of Santa Monica incubator Science Inc. and former chief executive of Myspace. Despite its success among a younger demographic, Jones explained that the company needs to prove that its app has a broader appeal. “Can they go from an application that is used primarily by millennials, with an almost secret feature set, to a mass audience? Can we see growth for the messaging component of the application with the 30-year-old-plus crowd?” Snap warned in its filing that the firm might not be able to engage large numbers of older users in a meaningful manner.

2. Young leader.

Spiegel, 26, would be a full two years younger than Facebook Chief Executive Mark Zuckerberg was when his Menlo Park social network went public in 2012. Zuckerberg is now 32. Investors will likely examine Spiegel’s actions very carefully based on his youth, said Jones. “You have an incredibly successful young CEO, who has his finger on the pulse of millennials, who is about to step into an incredibly powerful role,” he said. “It’s important to watch how Evan is as a public company CEO. How does he communicate his vision? How does he run his organization?”

3. Facebook’s assault.

Snap acknowledged in its filing that increased competition hurt its daily active user growth in the second half of last year, reporting a 3.3 percent increase between the third and fourth quarters, compared to a 17.2 percent spike between the first and second quarters. The most obvious challenge came from Instagram Stories, a video and photo slideshow feature that many have described as a Snapchat clone. “The biggest concern that Snapchat should have is Facebook has been relentless in cloning Snapchat features. It’s at a level that the Valley has never done before,” said Jones. “Can Snapchat withstand Facebook as a monster in the industry?”

4. Diversified advertising.

Victor Anthony, managing director of internet media at Aegis Capital of New York, noted that Snap will have trouble growing its revenue without direct-response advertising, which is designed to generate online traffic for sponsors. “I’d look for direct-response advertisers coming onto the platform. It’s not their strong suit; they are more brand focused,” he said. “Brand advertising will only take you so far.”

5. Advertiser returns.

Advertisers won’t stick around on Snap’s platform very long if they don’t see quantifiable results. If advertisers start leaving Snapchat, that could be a bad sign. “It’s going to be important for them to show not only that they are getting advertisers on the platform, but the advertisers are getting a return on their investments,” said Anthony. “If (advertisers) are getting a return they will keep coming back. If not, they’ll just go back to Facebook.”

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