Snap, crackle or pop - what's next for Snapchat?

For a company that gives away for free one single smartphone app and keeps making hefty losses, Snap – the parent company of Snapchat – has had a rather impressive stockmarket flotation. The Initial Public Offering of the company on the stockmarket saw its share price soar from $17 (£14) to nearly $29. However, the buoyant start was short-lived, and Snap shares can now be snapped up for around $22. This values the loss-making firm at £22.68 billion.

Once hailed as the only way for companies and marketers to reach “Generation Z”, those born around the turn of the Millennium, Snapchat’s rapid growth has slowed dramatically. After rival social network Facebook launched the “stories” feature on its Instagram service, Snapchat growth dropped by nearly four fifth to a mere 3.2% … a far cry from quarterly growth rates of between 10-23% in previous years. Still, Snap reports an active daily user base of 158 million people, most of them from a demographic that’s highly sought after by marketers.

So is Snap overhyped, overrated and overvalued, or is the company merely going through a dip similar to Facebook and Google, which both suffered sharp share price slumps before recovering in spectacular fashion?

While Snap is facing competition from Facebook’s Instagram, Richard Holway, chairman of TechMarketView points out that “Facebook took three months to return to its IPO price, and Twitter spent over two years at a significant premium. Snap could be back where it started within a week at this rate.” After all, users under 25 years of age are the most active, launching the app more than 20 times a day and spending around half an hour chatting with their friends. On the downside, Snap has warned investors that this is a particularly fickle age group with low brand loyalty. Competition – not just from Facebook, but also from rivals like China’s WeChat – can quickly be the next big thing and trigger a collapse of Snapchat’s user base. Anybody remember once popular MySpace, which was the go-to place for young people, only to wither over just a few months.

Investors should also be wary because the shares sold by Snap come without voting rights, which gives means shareholders have zero control and all the power rests with the company’s founder Evan Spiegel, which defies standard corporate governance, but has been fashionable in recent tech IPOs.

Another problem is that Snap’s focus is rather narrow, and that corporate partners who seek to advertise with Snapchat have very little visibility of the behaviour of Snapchat users. The app is part of what’s known as “dark social”, with most posts and exchanges being visible to friends only, and for not much longer than 24 hours. This robs Snap of the digital treasure trove of mining – and selling – the “social graph” of its users to corporate clients, who want to target highly specific user groups with their advertising and social engagement strategies.

This means the Snapchat platform does not lend itself to broader applications as those launched by Facebook – which even has gone so far as to develop solar-powered drones to bring internet connectivity to remote areas, an initiative dubbed Project Aquila. Facebook says the project’s aim is to bring down the cost of connectivity, not to boost shareholder value – although that is debatable. After all, Facebook depends on the power of its “network effect”, and the more hold it has on consumers in rapidly emerging markets, the more revenue opportunities it will discover.

Google is another example of a digital tech company that has gone broad, ranging from rolling out ultra-high speed fibre optic connectivity in US cities, developing the technology for driverless cars (recently folded into a subsidiary called Waymo), and pushing the boundaries of artificial intelligence with its DeepMind project (originally a spin-out of University College London). Google hopes to test all these budding technologies in its very own smart city, announcing last year that it would buy land where it aims to build a future metropolis.

Snap, meanwhile, is stuck with its one app, and a somewhat haphazard launch of its Snapchat spectacles, glasses that sport connected video cameras, which can record and share 10-second video bursts.

Apart from offering original investors an exit strategy to make money from their investment, the IPO provided Snap with a highly useful $3.4 billion pot of cash. Investors must hope that the money will be invested in developing and broadening the appeal of the Snapchat platform, and creating fresh revenue streams. If it will be used only to feed the monthly “cash burn” of the Los Angeles-based start-up, then Snaps’s initial share price pop will soon end up as a start-up crash and burn.