Snap's $25b IPO is based on a solid foundation

Gilles Ubaghs/Ovum
29 Nov 2016
00:00

The US-headquartered messaging player Snapchat, which recently became Snap Inc, has filed for an IPO which values the company at approximately $25 billion.

The IPO has been filed confidentially, which does not put the company under obligation to publicly share user and revenue KPIs, but allows it to gauge interest among investors ahead of going public early next year.

Snap’s messaging service currently has more than 150 million daily active users (DAUs), and the company has recently forayed into hardware, launching the Spectacles range of sunglasses that include video cameras.

Snap capitalizes on its understanding of millennials

Snapchat has been growing at a swift pace of 50% year on year for DAUs across all age groups, but it remains particularly popular among millennials. On any given day, it reaches 41% of all 18–35-year-olds in the US.

Snapchat appeals to millennials because it enables messaging, video calling, and video sharing. In addition, the app promotes engagement via media consumption. For example, it allows users to share their experiences in a fun and interesting way through the use of filters and emojis. They can also share live videos from events and concerts.

The immersive experience that Snapchat enables has been taken to the next level with the company expanding into hardware. In November 2016, Snap released Spectacles sunglasses which feature an inbuilt camera allowing users to record videos and send them directly to the Snapchat app. The sunglasses retail at $130 a pair, and Ovum estimates that if Snap sells Spectacles to just 10% of DAUs, it would generate more than $1.9 billion in additional revenue. As Snapchat’s user base grows, the addressable market for device sales will grow with it.

Snapchat is proving to be a popular platform for content consumption. For example, during the first week of the 2016 Rio Olympics, nearly 50 million Snapchat users viewed content from the event on the app. This has led to several traditional media houses such as the BBC and NBC embracing Snapchat as a content delivery platform. The company is also well placed as an advertising platform, given that it has one of the biggest millennial audiences among communications apps and is therefore ideal for brands seeking to target the millennial demographic.

Snap’s move into hardware, the rise of Snapchat as a content delivery platform for media houses, and its reputation as one of the best platforms to engage with millennials, as well as its growing user base, all build a solid foundation for the monetization of Snapchat.

However, Snapchat is no stranger to controversies such as large-scale data breaches. And privacy issues will of course raise their head with a device like Spectacles because they allow for recording on the move. Given the fact that users exchange a high volume of personal pictures and videos, Snap will need to carefully guard users’ privacy and security to maintain the steady pace of growth in users. Once public, the company will need to pay more heed to these issues, beyond simply encrypting messages.

Gilles Ubaghs is a senior analyst for Latin America at Ovum. For more information, visit www.ovum.com/

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