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NEW YORK (Reuters Breakingviews) - The parent of the Snapchat smartphone app thinks it's "a camera company." It's almost as if its initial public offering filing on Thursday – which may raise up to $3 billion and see the company valued at up to $25 billion – was somehow confused with GoPro's from a few years ago, when the camera-hardware maker said it was in the media business.
The purveyor of disappearing messages has some big things going for it that GoPro didn't have. Social-network services have a tendency to be winner-take-all propositions, and Snapchat is one of the winners. It is growing exponentially, too: revenue, at just over $400 million in 2016, was nearly seven times as big as in 2015.
That kind of statistic helps justify huge technology-sector valuations. There's plenty of room for growth in revenue per user, if Snap gets it right. At just over $1 per user per quarter, that's in the same ballpark as Facebook when it went public in 2012, and Mark Zuckerberg's $385 billion giant has pushed that up to nearly $5 in the most recent quarter.
That said, Snapchat's growth in average daily users is decelerating, with only a 3 percent increase from the third to the fourth quarter of last year, to 158 million globally. And unlike the profitable but admittedly slower-growing GoPro at its 2014 IPO, Snap's cash is disappearing faster than its messages, with nearly $1 billion evaporating in the last two years.
Any investor concern about that is potentially amplified by Snap's insistence that it's a camera company. Executives like 20-something co-founders Evan Spiegel and Robert Murphy may not really think that, but it still jars that they say so. They are also trying something they concede doesn't seem to have been done before – selling investors non-voting stock right out of the gate. Even Facebook and GoPro initially gave outsiders one vote for each 10 that insiders' shares have.
Having no say at all when executives may be living in a photographic bubble is a significant investment risk. Allowing founders control that's disproportionate to their economic interest paid off at Facebook but not at struggling GoPro, where the shares are trading at less than half the IPO price. Smart investors might consider taking Snap at its word and valuing it a bit more like an actual camera company than they otherwise would.