Snapchat’s parent Snap Inc. is sending shivers down the spine of tech companies willing to go public. Just months after its public offering, Snap’s stock price reached its IPO price during intraday trading on Thursday. The company is now barely trading above its IPO price. Snap’s fall is now becoming a case study for companies who are willing to go public to generate big capital.
Snap’s Fall from Grace
Snap Inc., the parent of popular app Snapchat was introduced to the NYSE with much fanfare. Just like other popular tech IPOs, everyone expected Snap to march upwards. However, the company’s stock took a steep reversal and has been going south ever since. The latest earnings report of the company was a total disaster, making many investors lose faith in the company’s potential to make it big. Investors will not be hesitant to keep Snap in the FANG bundle (Facebook, Amazon, Netflix, and Google) which can seriously hamper the perception of the company as a growth stock.
Though it is not theoretically bad for Snap to trade around its IPO price, there could be problems with capital generation. The company could have a harder time attracting talent because of smaller capital availability. Current employees will also find problems as their compensation packages are tied with the company’s stock.
Is Snap Inc. a Warning Sign?
Snap’s IPO and the fate of the stock since then has created a hurdle for other companies depending on ad revenue to go public. Even if the IPO is small, ad based companies will have to rethink their public offering. If Snap continues to plummet below $17, it could become a problem for all companies offering an ad model different from Google and Facebook. However, the market has had a few bad days for now which could mean that the company may finally get some respite in the upcoming weeks.
The biggest problem with Snap is its competition. The company depends entirely on its revenue from advertisement. However, services under the Facebook umbrella- Instagram, WhatsApp, and Facebook are mercilessly copying the features of Snap. This is making it more difficult for Snap to keep up, especially with Instagram’s new Stories feature. Investors are turning cautious with newer IPOs. Kathleen Smith from Renaissance Capital says that Snap’s price movement is ‘bad for future IPO activity. IPO investors are already cautious about valuations. Now they are going to be even more cautious.’
Will Snap recover? The company will have to show that it is profitable. Blue Apron, another IPO was launched with many expectations. Even though the company has mounting losses, it has shown a possibility for profits.
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