Snapchat is on at least three companies’ “most wanted” lists.
Question is, should it be on yours?
If you haven’t heard of Snapchat, it’s a photo-sharing app that allows users to send photos that disappear forever after up to 10 seconds.
Its price has been soaring. From a valuation of $800 million this past June, Facebook (Nasdaq: FB) has reportedly made an offer of $3.5 billion. And China’s Tencent Holdings (0700.HK), $4 billion.
It’s so coveted by its bigger brethren, Snapchat could be snapped up before you get a crack at an IPO.
But you never know. Snapchat has turned down previous buyout offers from Facebook, so an IPO isn’t out of the question.
So let’s imagine that Snapchat remains independent.
It’s a nice company. And private social sharing is coming on strong these days.
But is it a great company? A superstar company?
It has a small user base. Snapchat avoids mentioning specific size. But it does say that the company processes around 25 images every second, indicating heavy use among its users.
For comparison’s sake, seven months ago Instagram was also processing 25 photos a second and it had 10 million users.
But it’s way too early to say how Snapchat will do revenue-wise.
Instagram isn’t producing much revenue right now for Facebook, but that should soon change. Facebook is setting up 15-second video advertising slots on Instagram.
But, let’s face it: You really don’t get good deals investing in hyped-up IPOs.
Facebook, for example, has taken investors on a roller-coaster ride. An IPO share price of $38 plunged to $26 before rebounding to today’s $51 price. Shareholders who rushed in to buy on Facebook’s first day of trading paid upward of $45 for shares.
They’re finally showing a profit but not much of one.
It could have been worse. For IPOs launched during the past year,shares of Prosensa Holding (Nasdaq: RNA) have plummeted 70%; Tremor Video (NYSE: TRMR), 61%; and LipoScience (Nasdaq: LPDX), 55%.
But IPOs also hold out the tantalizing possibility of making big gains. Voxeljet (Nasdaq: VJET), one of the year’s top-five IPO gainers, has made day-one investors just over 300%.
Not bad, right?
But my research shows that pre-IPO investors made 77 times their original investment. That’s a 7,000% gain.
As for Snapchat, without all the numbers in, my research into the profit made by early investors should be considered a rough estimate. With that said, I’ve calculated that seed investors stand to make around 39,000%, assuming the $4 billion value China’s Tencent Holdings is reportedly willing to give it.
That’s an insane profit margin by any measure. Even for the earliest of investors (and seed money is as early as it gets), it’s on the high side.
My point is, hyped-up IPOs aren’t tremendous wealth-creating events. The time to invest is in early-stage companies before media attention revs up.
Hedge fund Coatue Management just invested $50 million in Snapchat’s latest round of fund raising. Total investment is now $123 million. This time around, the evaluation was just below $2 billion, substantially below the $3-4 billion purchase price that Facebook and Tencent Holdings reportedly offered.
Your turn to invest will come only with Snapchat’s decision to go IPO. But you really shouldn’t be waiting with bated breath.
Your opportunity to make really big money in Snapchat has come and gone.
But the private social sharing space will keep throwing out startups. I’m looking at a very interesting one right now. Its technology allows people to send messages without leaving a trace behind. It has a lot of other “privacy” options too.
And it’s just beginning to raise money.
Snapchat is a great story.
But the companies you should consider investing in are those whose stories are just beginning.