Snap's IPO to Be Haunted by Twitter and GoPro

Snapchat Maker Snap Files for $3 Billion IPO

Snap Inc. has gone to great lengths to distance itself from comparisons to Twitter Inc., the last big social media public offering. 

In its filing for an initial share sale, the maker of the Snapchat mobile app emphasized that it measures itself by daily active users -- a metric that Twitter doesn't disclose. Snap explained that its users tell stories chronologically, unlike the Twitter timeline, which displays most recent posts first. The younger company also said it plans to focus on developed markets, instead of racing to find users all over the world. Snap calls itself a "camera company," rather than focusing on its messaging app or media content.

No matter the positioning, Snap's numbers raise the same questions Twitter's did. User growth is slowing and losses are mounting, but revenue gains are a bright spot. That's how Twitter's financial details looked when it filed to go public in 2013, and the investor concern has never subsided, even after a spate of executive departures made way for new management and initiatives to jump-start user growth. Twitter's revenue started to slow when advertisers realized that with stagnant user growth, there wasn't a reason to spend more.

Fan Club

Snapchat is adding daily users quickly, but the rate of growth slipped in the second half of 2016

Source: Snapchat

Snap is also trying to avoid one of Twitter's IPO mistakes. Twitter compared itself in strategy to social media giant Facebook, but ultimately it paled in contrast to its rapidly growing rival, and has gotten punished by investors since then. Instead, Snap frames itself as a portfolio company, the owner of the Snapchat app, the Spectacles wearable video camera, and many more things to come. At the heart of it all is the idea of the camera -- because ``the camera screen will be the starting point for most products on smartphones.'' The word "camera" is mentioned 79 times in the IPO filing.

That approach may bring another uncomfortable parallel. GoPro Inc., which makes small wearable action-video cameras beloved by extreme sports aficionados and outdoor enthusiasts, had its own highly anticipated public offering in 2014. It had a premise similar to Snap: capturing memories in the moment they happen, with the raw perspective of the user. As demand for its devices subsided, GoPro aimed instead to be a media company, seeking to generate more revenue from content that users created and selling advertising. That hasn't worked out as planned. GoPro recently cut 200 jobs and its entire entertainment unit, and its shares now trade for less than half their IPO price. Other makers of wearable devices, including Fitbit, Jawbone and Pebble, haven't fared much better.

Snap can avoid the pain of either comparison by not promising more than it can deliver, said Brian Wieser, an analyst at Pivotal Research Group. While Snap is more analogous to Twitter than it is to Facebook, Wieser said, it doesn't have to make the same mistakes Twitter did in its IPO.

``Twitter went out for their IPO and in their road show just talked about how ubiquitous they were going to be,'' Wieser said. ``I think if Snapchat embraces that it's a niche platform, it could be a good thing.''

Twitter's slowing user growth is also tied to stagnant product development, with a revolving door of executives in charge of the vision. Snapchat, by comparison, has kept up a steady pace of new ways for people to use its product. A chart in the IPO prospectus details how user growth gets a bump whenever Snap releases something new and fun -- such as lenses that can turn a user's face into a puppy's, or make someone barf rainbows in a selfie.

Snap warns extensively about betting on its daily active user growth in its filing. The company says DAU growth is likely to be "lumpy and unpredictable," fluctuating with new product updates and investments, and user behavior. With the focus on more developed markets, it's not claiming it will be ubiquitous. 

Still, the vast majority of Snap's revenue comes from advertising. Contribution from Spectacles, Snap's glasses for taking short videos, so far isn't material. Even if investors embrace Snap as a narrowly focused product, advertisers will be asking the same questions they asked Twitter -- and Snap will depend on rapid revenue growth to make up for its costs. As of 2016, Snap's expenses still exceeded sales.

--With assistance from Selina Wang.

    Before it's here, it's on the Bloomberg Terminal.