As Snap Inc. approaches its initial public offering, one question on investors’ minds is whether the parent of the Snapchat social app will be the next Facebook (symbol FB) or the next Twitter (TWTR). Shares of the two established social media companies have taken divergent paths since being offered to the public.
Bear in mind that it’s risky to make an investment in the early days of an IPO. Kiplinger’s advice with any public offering is to wait at least 90 days before buying in. That allows enough time for the hype to die down and rational analysis of a company’s business prospects to take over.
Snap certainly has a lot of hype surrounding it, and early analysis of its business prospects reveals risks.
For the uninitiated, Snap’s Snapchat mobile app integrates with a smartphone’s camera and allows users to send and receive photos, videos and short messages. The messages, known as snaps, are designed to disappear within seconds of being viewed. This ephemeral nature of the app led to its early appeal. But the images don’t always disappear. They can be preserved by taking a screenshot, and Snapchat has added features known as Stories and Memories, both of which allow users to store and share their snaps for longer periods.
Snapchat quickly caught on with a young demographic, including coveted 18- to 34-year-olds. On average during the fourth quarter of 2016, 158 million people used the Snapchat app daily, a key industry measure known as daily active users, according to Snap’s S-1 registration statement filed with the Securities and Exchange Commission. That represented growth of 48% year-over-year. Snap makes money by delivering advertising to this growing audience.
But some analysts say Snapchat is already showing cracks. It’s competing head-to-head with Facebook, the 800-pound gorilla of social media that has 1.23 billion daily active users. Facebook also owns Instagram, an image-driven app that’s a rival of Snapchat. While Snapchat’s daily active users are increasing, the growth rate slowed in the second half of 2016 after Instagram debuted its own Stories feature.
“The slowdown in daily active…