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Has Snapchat created a bubble?

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Snapchat was founded by Evan Spiegel, Bobby Murphy and Reggie Brown in 2011.  They created the app and Snapchat quickly became very popular with teenagers.  Snapchat allows people to take a photo or video and send it privately to a contact. You can decide how long the photo or video will be available to watch (up to 10 seconds). If the recipient chooses to watch the photo or video (Snap) again, he/she can do it within 24 hours. After that, the pictures and videos disappear.

During the first week after the IPO, the Snapchat stock rose more than 40% and became more valuable than some of its biggest competitors in the social media industry. Snapchat has been available on the trading floors for almost a month and the stock has been in a rollercoaster ride so far. The stock almost touched $30 and then fell back below $20. The stock then recovered and is currently trading above $20 again.

Most analysts think it is too soon for retail investors to consider Snapchat a serious opportunity, for now, they’re advising to wait some more time for things to settle. Is Snapchat the next Facebook and will it be able to grow in the coming years? Or is Snapchat the next Twitter, with slow growth and a struggle to become profitable?

Analysts are screaming overvalued due to some aspects:

  • The IPO doesn’t carry voting rights; those are exclusive with pre-IPO shareholders.
  • Snapchat’s user growth has slowed down to 5.3% after Instagram launched “Instagram Stories”. Facebook has also integrated a stories alike function in its app.
  • The experience of the senior management team is in question.
  • The company is carrying high expenses and cash costs.
  • The effectiveness of advertising campaigns on the Snapchat platform are yet to be proven.

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