All the kids are raving about Snapchat (SNAP) and so were investors in advance of the company's IPO which occurred earlier this month. For those who are unfamiliar with Snapchat, it is a mobile app that allows you to send videos and pictures, both of which will self destruct after a few seconds of a person viewing them. Snapchat is also a fun messaging app and is very popular among Millennials and high school students.
The stock's initial public offering was initially priced at $17 per share (a common occurrence for many of the social media stock offerings in recent years). However, after the first day of trading, shares opened at a whopping $24 per share, rising to just barely below $30 only to drop below it's pre-IPO opening price.
This ultimately gives SNAP a market capitalization of $29 billion, which quite frankly is ridiculous. If there was ever a prime example of understanding a company's function, this would be one of those times. Snapchat's only hope for generating revenue is through "ads" because the app is free and to be a user is also free. It took Facebook a long time to prove that their business model and advertising generation would justify its massive market cap. I think Snapchat is going to have a hard time justifying that the company is really worth $29 billion. Instagram can already do everything that Snapchat can do and more, and even Twitter is having a hard time justifying its price since the company's IPO from a few years ago.
The lesson here? Don't buy into the stock if the long-term growth plans and prospects don't make any sense or are non-existent. Check out some more details for Snapchat's IPO at Bloomberg HERE.
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