Stocks

Snap Inc Loses All IPO Gains, Stock Back Where It Started

Snap shares were down by about 5% on Thursday to hit their initial public offering (IPO) price, reflecting investors’ loss of confidence in the social media company, which is clearly struggling to compete with Facebook. The shares dropped to $17.

Snap shares, IPO
KiNG_PEEWEE / Pixabay

Snap shares back at IPO price

Snapchat is a mobile app made by Snap that allows users to capture video and pictures which disappear after a few seconds. In March, when the Snapchat parent held its IPO, it was the hottest technology listing in years, notes Reuters. From the IPO price of $17, Snap shares surged $29.44 in just a few days.

However, the stock has been on the decline since then. The worst drop occurred when the company reported lackluster first-quarter results on May 10, posting revenue and earnings that were below expectations. It must be noted that CEO Evan Spiegel received a $750 million bonus after successful implementation of the IPO.

Many Wall Street analysts are skeptical of Snapchat’s growth from here because of its high valuation and dwindling user base. Snap has even warned investors that it might never be profitable on the top line, notes Reuters.

“In particular, Instagram, owned by Facebook, may emerge as a substitute for Snapchat,” writes Morningstar analyst Ali Mogharabi.

Kathleen Smith of IPO research firm Renaissance Capital says that Snap might make it hard for other public offerings in the tech sector, notes the New York Post.

An uphill task, but not impossible

Snap faces an uphill task, as Facebook and Instagram are blatantly copying some of its best features and riding high on the success. Facebook has 1.28 billion daily active users, almost eight times Snapchat’s user base. However, Snap still has options to grow by selling more ads and creating something that would be more difficult for Facebook to mirror. It could even take inspiration from Facebook, which dropped below its IPO price on its second day of trading. For the first 14 months, Facebook shares worked to break even, but since then, they have surged 300%. Chinese major Alibaba also dropped below its IPO price 233 days after the IPO.

In the first quarter, the platform had over 3 billion snaps shared daily, an increase from 2.5 billion in the third quarter of 2016. The company stated that on average, users spent at least 30 minutes a day on the platform. During the conference call, Spiegel stated that the company worked on improving the experience for users in the first quarter, focusing primarily on Android mobile phones. Snap Chief Financial Officer Drew Vollero said although the company is taking a loss, it is “still in investment mode.”

Snap is also facing challenges in selling ads, with Facebook and Google taking the bulk of the ad money. However, Spiegel stated that automation will enable the company to earn more money for advertisers.

“People are going to copy your product if you build great stuff,” he said. “Just because Yahoo has a search box doesn’t make it Google.”

Spiegel also thinks that education is a major issue at the company, referring to the challenges in advertising.

On Thursday, Snap shares closed down 4.92% at $17.