Did The Snapchat IPO Narrative Just Get Scarier?

The good part for Snapchat is that reportedly, the company is closing in on a big advertising deal, worth about $200 million. And Snapchat needs many such deals to bump up its revenue per user, to offset the close ties between its revenue and cost of revenue. With its current business model, growing engagement, which translates to higher revenue, also means growing payouts to partners like Google Cloud and Amazon. Quoting from a post on Fortune:

"Chief Strategy Officer Imran Khan asked investors to gauge how much users engaged by looking at Snap's cost of revenue. Traditionally, investors focus on metrics such as daily active users or minutes spent on the app. Snap's cost of revenue is primarily driven by how much the company has to pay to partners such as Alphabet's Google and Amazon.com to support data and bandwidth. This is based on how often users engage with the app and the types of features they use."

Be that as it may, not everybody seems entirely convinced after Snapchat's roadshow:

'There was so much hubris there it scared me away... This felt like the late technology bubble roadshows,' one of the investors said, referring to the IPO bonanza of the dot-com boom in 2000.

One other positive for Snap Inc is that reportedly, the company has started selling its "Spectacles" online for $130 a piece. What that does well is to de-link Snap Inc's revenue to some extent from its cost of revenue. What Snapchat has going for it is stellar top-line growth, and if the company is to grow into its mammoth valuations, it'll need a lot of those big ad deals, and hardware sales to bump up its revenue per user. For now, the Snapchat IPO looks fraught with risks, making it a very high risk reward bet. As things stand, it seems that Facebook could gain the most from the Snapchat IPO, with a little bit in it for Twitter as well.

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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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