Did The Snapchat IPO Narrative Just Get Scarier?

Coming to the other theory that we were talking about - it's the one that Snap Inc's management offered in response to questions pertaining to slowing user growth. Reportedly, Snapchat blamed its Android app for the decline in user addition, and frankly, that's pretty scary:

"When asked about a slowdown in new users on its Snapchat photo-sharing mobile app in the fourth quarter, the company blamed a product issue with its Android version, according to investors who attended the company’s initial public offering roadshow presentation Tuesday in New York."

There are two parts to why this is a little disconcerting. The first is well explained by an analyst who attended the event:

“Pointing to problems with Android is not addressing the elephant in the room, which is Instagram,” said Sean Stiefel, a portfolio manager at Navy Capital, who attended the presentation. “They sort of danced around the issues with user growth.”

Secondly, that's not the kind of explanation you want to hear from a company that has set itself the ambitious target of going public via the biggest tech IPO in many years. It's not the kind of excuse you want to be making if you're gunning for a valuation in excess of $20 billion. More so because that's Snap Inc's primary business - running an app. And if it can't do that as well as it should, a prospective investor might find that unnerving. It's not something businesses can afford to do in this day and age,  much less social media businesses that rely so heavily on user acquisition, experience, and the network effect.

Facebook is mounting even more pressure on Snapchat.

Further, the explanation only holds for the fourth quarter, suggesting that the 7% sequential growth in Q3 wasn't because of any such glitches. So, is 7% the kind of DAU expansion investors should expect after buying a stock that's valued at 47 times trailing twelve months sales? Besides, the fact that this growth rate declined from as high as 17% during the first half of the year brings us back to the growing concern around competition from the likes of Instagram. And as it appears, Facebook won't cut Snapchat any slack. The social media giant is now set to launch its latest salvo via WhatsApp, introducing a 'Stories' like feature on the messaging platform. In fact, Facebook has also reportedly been testing a 'direct' private messaging equivalent of the same on its core app, which allows users to send photos and videos straight from the camera interface. And again, like in Snapchat, these photos and videos can be viewed twice before they vanish forever.

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Disclosure: Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a ...

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