With Snap's impending IPO, investors are struggling to figure out what to make of the self-designated "camera company."
Is Snap the next Twitter? What to make of competition from Facebook? Here's the rundown of what you need to know before Snap goes public.
1. Snap is Losing a Lot of Money
The company had a net loss of $514.6 million in 2016, up from $372.9 million in 2015. For a tech company pre-IPO, these numbers aren't surprising, but there are good reasons to think that Snap may have trouble scaling up to the multi-billion dollar revenue company its valuation implies it'll become.
Most of Snap's ad revenue comes from its manual sales team and only within the last couple of months did it move its automated ad product out of beta and open it to more advertisers. It may also need to expand beyond just ad revenue to fulfill its potential.
On its current path, there's good reason to doubt if Snap will ever be profitable and you can expect it to have a tough first year. However, if it does, revenue won't be the biggest culprit.
2. User Growth is Slowing
The biggest red flag for Snap is that its user growth is slowing. Growth in the second half of last year was slower than in the first half. Why?
Well, the elephant in the room is Instagram, which blatantly (and admittedly) copied Snapchat's Stories platform. Instagram's Stories platform has been very successful, reaching 150 million daily active users since it launched in August. Snapchat's diminished engagement correlates closely with Instagram Story's rise.
In its S-1, Snap attributes its slowed growth in part to "increased competition." Snap would likely argue that this slower growth is a blip rather than a trend. But there's reason to think that this take is wrong.
Instagram's Stories could well surpass Snapchat in active users by the middle of the year, while Facebook is already testing similar Story-like features for its Messenger and Facebook platforms.
The competition isn't going away anytime soon. And Facebook could end up beating Snap at the platform it invented.
3. The Twitter Parallel - The Shoe Fits, Sort Of
In terms of revenue and network size, Snap looks a good amount like Twitter when it went public. However, there are some key differences between the two.
One big leg up Snap has on Twitter is its ad format. Video ads will be much more attractive to advertisers than Twitter's embedded tweets, and video ads typically go for much higher rates per view.
Snap also has a much larger US-based audience than most of its content platform competitors, with 60 million daily US users. Also, it finally moved its automated ad exchange (think Google Adwords but for Snapchat video ads) out of beta. Whether or not that product gets traction will be key to its revenue growth this year and beyond.
Snap's average revenue per user looks good for a company pre-IPO, at $2.60 per user. By comparison, the average across Facebook's more mature ecosystem of platforms was $4 per daily user in 2016.
However, for Snap to live up to its valuation, it will have to succeed where Twitter didn't: continuing user growth. Ultimately, Twitter seems likes its growth has topped out just north of 300 million monthly users. For a company that once had ambitions to be the next Facebook, this is rightly seen as a failure.
Snap's post-IPO success will be measured by a similar yardstick. Its trajectory will be determined by whether or not it can continue to grow its network. Given that growth may already be slowing, you can expect Snap to have a rough first year, especially as direct competition from Facebook's multiple platforms increases.
But if Snap can turn its growth story around, it will have room to figure out how best to make money.