Snapchat, the social media platform that deletes pictures and videos after being viewed once, were once considered a one trick pony. The staying power of an app that had one use was questioned and people generally wrote their first billion dollar valuation off as the worst excesses of the current tech bubble.
However, the company celebrated its fourth birthday in September and alongside this their first potentially profitable year.
Given that it was questioned how they would make money, it is impressive that Evan Spiegel, their controversial CEO, has managed to create a company that is expected to bring in $100 million this year.
They have mainly done this through advertising on the various add-ons that they offer their 200 million+ daily users, such as Snapchat Live and Discover. They are also releasing Lenses that can sponsored, these allow users to customize their selfies to change their appearance in funny or disturbing ways. One day of this kind of advertising will cost companies $450,000 on a regular day or $750,000 on peak days such as holidays or significant days.
With this potential money spinner and their predicted $100 million year, it sounds like they are in a great financial position, but this may not be the case.
One of the primary reasons for this is simply that they have a huge value, $16 billion at present with money making capabilities significantly falling short of what this valuation would indicate. It is in a similar position to Facebook, who have a market value of over $270 billion, yet do not have the profits to legitimately justify this kind of value in the real world.
For instance, Total Quality Logistics have revenues of $1.6 billion yet have a market value at a fraction of Snapchat. Similarly there are thousands of companies who make more money than the social media platform, but who have values at a tiny percentage. So what does this say about these multi-billion dollar valuations on shaky finances (last year Snapchat only had $3 million in revenue for instance)?
It is that market powers are inflating their value, meaning that they are betting on profits eventually justifying the investments made. This means that it is a time bomb until investors start selling or pulling out if this potential is not met.
So will Snapchat survive?
It is very hard to tell at the moment, as it sits amongst several unicorn status companies who have clearly had significant success but have valuations acting as a potential millstone around their necks as expectation drives them to force through profitability. Hopefully they will continue to grow their revenues to a place where they can justify their valuation, they are certainly taking steps in the right direction.