The ghost stirring up markets | Business| Economy and finance news from a German perspective | DW | 02.03.2017
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The ghost stirring up markets

Messaging service company Snap has gone public on Wall Street. Investors helped the stock take off the ground, but the IPO entails a number of risks, as the firm's business model is weak, argues DW's Sophie Schimansky.

There's been a lot of hype surrounding the public offering of tech company Snap. On Thursday morning, its market valuation surpassed all expectations. Snap CEO Evan Spiegel is promising investors a success story that rivals Facebook's. But still they are many risks.

What happens when the technology world's friendliest ghost gets listed on the stock market? Flesh-and-blood mortals go IPO-crazy. That's what happened on the floor of the New York Stock Exchange, with people crowding in to catch a glimpse of Snap founders Bobby Murphy and Evan Spiegel.

Actual demand among investors exceeded analyst's and even Snap's most optimistic expectations. In fact, anticipation of Snap's IPO was downright euphoric. The company snapped up a total of $3.4 billion (3.24 billion euros) in the private financing rounds from more than 20 investors, including Alibaba's Jack M. However, analysts fear Snap's IPO poses a number of risks for investors. Triton Research CEO Everett Wallace points to Snap's less than mature business model.

Popular features

Still, it's highly popular Snapchat app allows users to send pictures and short videos that self-delete after being viewed. Its numerous photo filters are especially popular. Users can take selfies that transform them into a dog, a pumpkin, or a devil, or maps another person's facial features onto their own. Snap's more ambitious projects include Spectacles, colorful sunglasses with a built-in camera that can take pictures and upload them. Snap is also developing a drone to take aerial photos and videos.

Snap generates revenue through ads that display in the so-called "stories" that users generate. Although the company hasn't released concrete sales figures, in all probability, it took a loss of $500 million last year.

That sounds suspiciously similar to Twitter. Since its inception in 2006, the social media platform has failed to become profitable. Last quarter results reported a loss of $103 million, or 15 cents a share. The share price was $26 in November 2013, and now stands at around $16 dollars.

But Snap's Evan Spiegel remains ever optimistic. Early this year he claimed the company will be the next Facebook, not the next Twitter. Facebook's initial public offering started at $36 a share and is now over $130. Snap investors are licking their chops at the prospect of that kind of success.

Be cautious!

Rob Enderle of the Enderle Group said there are several reasons not to invest in Snap. He points to an unstable economic environment, uncertainly in the Trump era and rising interests that make alternative investments look more appealing. Enderle expects 2017 to be a volatile years that could frighten away tech investors.

Of course, this is also true for other companies hoping to go public this year. Not many tech companies have dared to make the leap recently. There were 26 in 2016, that raised a total of $4.3 billion. That's the lowest figure since 2009 according to analysts from Dealogic. Even Airbnb and Uber are still fighting to achieve those big gains. And Uber will likely pull in twice as much for investors as Snap. Evan Spiegel brushes away these concerns, and many investors will likely ignore the risks inherent in Snap's business model.

At the moment enthusiasm alone seems to be lifting Snap up. User numbers are growing rapidly in comparison to Facebook and Twitter. More than 150 million people worldwide actively use the video sharing app every day. For now, Snapchat is leaving Twitter in the dust.