snapchat market bubble

Snapchat and the IPO Bubble

In a little over five years, Snapchat has become one of the most popular social media platforms out there, attracting over 60 million users a day in the U.S. and Canada. It’s especially popular with the younger generation, many of whom favor its fast pace and impermanent nature over Facebook.

Because of this popularity, it was a fairly major event when the app’s parent company, Snap Inc., had its IPO at the beginning of March—that is, its stock was offered to the public for the first time. And the results were astounding. The company opened at $17 a share on March 2nd, and closed at $25 a share, netting a total of $29 billion. On the surface, this seems like a good thing, not only for Snapchat investors, but for the economy in general. But if you look closer, it could be a sign of another tech bubble, like the dotcoms of the early 2000s. And just like them, this new bubble is doomed to burst.

The Dotcom Bubble

In the late 90s and early 2000s, when the Internet first started to take off in earnest, websites and web-based companies were all the rage. Dotcom became like a magic word that attracted investors from all over, and people made huge amounts of money on the IPOs of these companies. They were new and they were profitable. Except that they turned out not to be all that profitable after all.

What drove the dotcom tech bubble was excitement over “the next big thing.” People had seen sites like Amazon and Google become huge successes overnight, and knew that if they could get in on the ground floor of an idea like that, they’d make millions—or more.

So the IPO of just about any new web-based company could generate excitement and cause a rally, driving stocks up. The problem was, though, most companies aren’t like Amazon and Google. Many didn’t actually have a solid business plan and turned out to be incapable of making a profit. Once that information came to light, these companies’ once high stocks started dropping rapidly, and the tech bubble burst.

Snapchat’s Similarities

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In many ways, apps have become the new dotcoms. Instead of finding the next Google or Amazon, now everyone wants to get in on the ground floor of the next Facebook or Uber. But again, not every company can have that kind of success, and Snapchat is a prime example.

On the surface, Snapchat looks to be doing well. But in terms of popularity, 60 million users per day isn’t that much—especially compared with 175 million or more per day on Facebook. Not only that, it’s been losing users lately, rather than gaining them. And to top it all off, many doubt that the app can be profitable, even if it is successful. Since it’s a free service, its profit comes entirely from ad revenue, which has proven a difficult route even for Facebook and Twitter. All things considered, it’s doubtful that Snapchat will stand the test of time.

So the question remains, what happens when the company’s currently soaring stocks catch up with the app’s inability to sustain itself? Just like the dotcoms, the bubble will burst, and investors will be left with next to nothing.

And there are plenty of other companies that are likely destined to go the same route: apps that excite people and draw a lot of attention, but don’t have a solid business plan or a real, tangible way of making a profit once the dust settles. Beware of this new tech bubble and tread carefully in your own investments.