Is The Snapchat IPO Proof Of A Tech Bubble?
Earlier this month, the 2nd of March, there was quite a fuss on Wall Street. The long-anticipated IPO of Snap Inc. (also known as Snapchat) was imminent. The CEO and founder Evan Spiegel rang the bell at the NYSE together with his co-founder and CTO Bobby Murphy.
Snap Inc. shares opened at $17 and by the time the markets closed the price had risen to $25 resulting in a market cap of $29 billion. It's not very hard to see this really is a remarkable performance for a (tech) company that is built around just a single product, Snapchat. Although Snap Inc. calls itself a camera company, those who buy stock in Snap Inc. likely see themselves as simply investing in Snapchat.
The fuss around Snap Inc.'s IPO is not merely due to the share price and the subsequent valuation, but also for the characteristics and details of Snap Inc. itself. For example, it is doubtful and unclear if Snapchat is even profitable, and Snapchat is consistently losing daily active users, the key performance indicator amongst peers. Snapchat is under heavy fire, especially from Facebook with Messenger and Instagram, which is cloning almost every feature that makes (or made) Snapchat unique. These striking points make such a valuation as stated above arguably both unwise and even shocking.
The Snap Inc. IPO reminds us of the Netscape IPO in 1995. Netscape was the first real "DotCom" business that was valued at a high — unanticipated — price, setting fire to a real IPO-blaze. When their first trading day closed, shares traded for $58.25, an 108% increase in comparison with their IPO opening price. All of this without being profitable or being a good business by accounting standards.
The parallels between Netscape and Snap Inc. aren't really hard to miss. Netscape was without any doubt a pioneer in the scene, as Garrison and Callahan state in their article “Does Austrian Business Cycle help explain Dot-Com Boom And Bust?”:
The Netscape IPO served as a highly visible symbol for the potential of the Internet, and the potential investor profits that might be gained by arriving at the dot-com party early.