What is the purpose of Snapchat’s astonishing Initial Public Offering, how Snapchat will use the investor’s money, and why does it need such a tremendous amount of funding?

Snapchat’s Registration Statement, provided at the bottom of this article, explains the corporation’s emerging history, its course-of-business strategy that will generate the desired profits, and the risks of its planned investment. We will explain each of these elements for better grasping the risks of this offering, or transaction as the corporation is now in the effective Period.

The company showed a diagram of Snapchat’s development over time since its beginning as a picture messaging application, “Picaboo.” Emerging from one thousand daily users in 2011, to more than 50 million daily users in 2015, Snapchat’s diagram represented its profitable technical improvements through these years. Snapchat indeed demonstrated its fruitful strategy of this business throughout its young age. Nonetheless, the consistency of Snapchat’s success remains unknown, and unproven. In fact, neither the age, nor does the short-term success of the corporation justify why such an immense offering would be promising. It is well known that digital media market is very unstable and a successful application or social media instrument could be abandoned abruptly as consumers always follow up with new trends. There are many good examples of this fact, but the best example could be furnished in the BlackBerry Messenger and MSN Messenger, which had dominated the market for a while before facing a dramatic loss as consumers swiftly followed new trends and applications. Unlike enterprises that preserve tangible assets, which can be sold to ease up the losses if incurred, enterprises that are based on intangible assets, like Snapchat, have higher risks since their assets are embodiments of their innovations that are hard to sell if these innovations failed to be monetized because who wants to buy abstract properties that did not work out?

As for the course of business, Snapchat’s strategy, according to the Registration Statement, is to invest and improve “camera innovation,” which will monetize consequently through advertising. Snapchat used its previously produced Glasses to exemplify the camera innovation that is to be created. Indeed, Snapchat’s strategy may come up with new products and “camera innovation” that will hit the market and attain a great success, which optimistic investors are hoping for. However, taking into consideration the failure of the Snapchat’s smart glasses, it is prudent to worry about Snapchat’s business strategy. Snapchat concedes that all of its revenues are to be secured by advertisements, a vital information in terms of evaluating the shares, stock value, and the business strategy of generating the return. Indeed, a determinative question in the evaluation of this transaction is whether the advertisement business, on which Snapchat is depending, will monetize enough profits to cover the massive amount of money received by investors, especially in the presence of the fact that Snapchat, as other internet-based businesses and applications, may give up its trend to new applications and drop down from its peak, leading merchandisers to alter their attention away from Snapchat toward those new applications for advertisement purposes.

All of these factors and considerations lead us to analyze the risks that can face Snapchat in both the short and long term. As required by the Securities Exchange Commission, Snapchat has already disclosed some of these factors and risks in their Registration Statement, making it more obvious to better understand the potential risks investors may encounter.

The Registration Statement in respect to the risks of Snapchat explicitly reflects the fact that Snapchat’s investment is heavily dependent on its users. One of Snapchat’s expressed risks is that “Snapchat’s ecosystem of users, advertisers, and partners depends on the engagement of Snapchat’s user base. Snapchat anticipates that the growth rate of its user base will decline over time.” Another significant risk factor Snapchat stipulated in the Registration Statement is that “new advertisers, the loss of advertisers, or a reduction in how much they spend, could seriously harm its business.” Other mentioned factors focused on Snapchat’s possible “lack of productivity,” and the “previous losses that can occur again.” More clearly, Snapchat indicated the “expectation of the possibility to incur operating losses in the future, and never maintain profitability.”

Worth noting is that the issued class of stocks of Snapchat is a “non-voting” class of stocks. That is, the investors and owners of these stocks have no saying in the corporation’s decisions, operation strategy, and management methods. In other words, Snapchat’s founders, by maintaining 80% of the voting shares, will retain an absolute control over the business and will have the discretion to decide the course and strategy of its business, exclusively. For example, if the founders decided to engage in a highly risky transaction and the investors are very pessimistic about this transaction, investors cannot object or prevent the controlling founders (also stock holders) from conducting the foregoing transaction, which makes it less attractive to some sophisticated investors.

Overall, keeping in mind Snapchat’s huge expenditures and limited source of revenues, it is not necessarily true that success of Snapchat’s investment is rising ahead. Although Snapchat has demonstrated great success, and its intended enhancement of camera platform may be fruitful, it is very conceivable that this success has already reached its summit and snapchat is on its way downward. Factually, Snapchat is a baby company that is engaged in one of the most unstable and volatile fields before even establishing a trustworthy consistency. In addition, the only source of revenue that Snapchat is completely relying on, which is advertisement, is absolutely contingent on maintaining Snapchat’s users, the improbable occurrence in this changeable market. Indeed, if Snapchat’s users avert their eyes towards new social media instruments and gradually abandon Snapchat application, investors will suffer dramatic losses as the stock value will sharply dropdown. Adding these factors to the fact that Snapchat needs a tremendous amount of revenues to cover the massive funding it elicited from investors makes this transaction somehow questionable. Therefore, we strongly encourage investors to further analyze this offering and read its Registration Statement, especially the risk factors part. We warn investors that this offering may turn out to be a huge mismeasurement.

This analysis is made independently and represents the author’s own opinion.

Snapchat’s Registration Statement: Click Here