Snap Shares Lose Their Initial Pop

Snap Shares Lose Their Initial Pop

That would be a major boost for investment markets and a positive encouragement to other small companies that are seeking to become "unicorns" - start-ups that grow to earn their backers a $1 billion valuation.

But since Monday, Snapchat's stock has been tumbling.

But part of the problem is that the stock might have been overvalued to begin with. Despite the 12% decline Monday, however, the market cap is still at $27.5 billion. This means that an investor who buys shares in Snap now is likely to lose money on it in the long term.

But should this early turbulence give investors pause?

After a dry spell of tech IPOs, the company behind social media app Snapchat, Snap Inc (NYSE:SNAP), finally went public. Facebook's stock fell below its opening price right away. Snap opened Thursday at $24 per share.

So how come the stock is still trading far above its $17 offering price?

Twitter, Inc. (TWTR - Free Report) went public in November 2013. IPOs with big positive price movements ("pops") carry both positive and negative implications for the company. But while Twitter and Facebook completed IPOs at about 20 and 13 times forward revenue, Snap is trading at valuations over 30 times forward revenue after falling by nearly a third. From its launch in 2011, Snapchat has evolved into a 150-million-user, multi-millionaire brand.

But analysts have been raising significant concerns about Snap's user growth, valuation and hype. Its youthful user profile - the majority are in the 18-34 age bracket - fits in perfectly with Gulf demographics. Meanwhile, Snapchat added 36 million users in the first half of 2016, but only 15 million in the second half.

Will Snap be more like Facebook, or will it mirror Twitter's footsteps?

Since its IPO, Facebook has done well, although its initial days weren't exactly frictionless. Bear in mind that we are talking about a photo-sharing app here that is merely a handful of years ago. This massive user base helps Facebook's Instagram make billions in advertising revenue.

Pricing for national integrated Snapchat ad videos runs about $10,000 a month, according to the digital marketing agency Wallaroo Media; between $450,000 and $750,000 a day for sponsored lenses; and $50,000 a day for Snapchat "Discover" ads.

Analytics firm AppDynamics filed for an IPO at the end of previous year - but canceled the IPO and sold itself in January to Cisco for $3.7 billion instead. However, as mentioned above, Snap can continue trading at irrational on account of its strong revenue growth and path to profitability.