Snapchat's lackluster ad business threatens $16 billion valuation

Fri Nov 20, 2015 11:59am EST
 
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By Heather Somerville

SAN FRANCISCO (Reuters) - Snapchat, maker of a free mobile app that lets users send videos and messages that disappear in seconds, is struggling to gain traction with advertisers, fuelling investor concern that its $16 billion valuation isn't justified by a business that hasn't yet shown it has a steady source of income.

Even in a world where upwards of 140 private companies are reckoned to be worth $1 billion or more, Snapchat's outsized value stands out. Fidelity Investments' decision to slash the estimated value of its Snapchat stake by 25 percent in the third quarter exacerbated concern about the company's ability to meet advertisers' expectations.

For Snapchat advertisers, the question is whether prices that can reach more than $500,000 for some ads is worth it when the company lags competitors in targeting specific consumers and measuring how ads perform.

"If Snapchat doesn't get that figured out, they're in trouble," said Nick Godfrey, chief operating officer at RAIN, a digital strategy agency.

Snapchat lost more than $128 million in the first 11 months of 2014, according to a financial statement leaked earlier this year, which also showed Snapchat had revenue of $3.1 million. Its advertising business began in mid-October. Tech media outlet Re/code estimated that Snapchat's revenue could reach $50 million in 2015, citing sources familiar with the company. Snapchat doesn't comment on its revenue or its losses.

The company has raised $1.2 billion from investors, ample resources to develop its advertising techniques. But time may be limited as the company is in early discussions for an IPO, according to sources. Snapchat's $16 billion valuation was calculated at its most recent funding round in May based on how much investors were willing to pay for shares.

More than 100 companies, including General Electric GE.N, McDonald's (MCD.N: Quote), Nike (NKE.N: Quote) and Coca-Cola (KO.N: Quote) have advertised on Snapchat to capture the attention of the app's predominantly young audience - 60 percent of users are aged 13 to 24. More than 100 million people use Snapchat to watch 6 billion videos daily.

So far, many advertisers have had a lukewarm response to the results.   Continued...

 
A billboard displays the logo of Snapchat above Times Square in New York March 12, 2015. REUTERS/Lucas Jackson