We're now just a week away from the highly anticipated Snap, Inc. (NYSE: SNAP) IPO, and it's easy to fear the worst. Most of the reports that you've probably read -- including many of those by my fellow Fools -- are blasting the social media upstart as an investment.
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Snapchat's popular, but mounting losses and monetization challenges make it a risky bet for most portfolios. I won't argue against the low floor, but I think the market's also ignoring the high ceiling. Let's go over a few reasons why Snapchat's parent company may make sense in your portfolio.
Image source: Snap, Inc.
1. Being a contrarian can pay off
Initial reports of a Snap IPO late last year circulated with a $25 billion valuation that could balloon up to as much as $40 billion. Collective head shaking finds the IPOs underwriters hosing down their expectations. Snap now expects to price its offering between $14 and $16 a share, a deal that will value the IPO closer to $18 billion -- in line with its last round of private funding in early 2016.
Skepticism is already giving next week's first wave of retail buyers a bargain relative to where the hype seemed to be heading. The stock is still going to be a magnet for naysayers, and as soon as the short positions start to build it's a safe bet that short squeezes will push the stock higher whenever Snap has something positive to say.
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2. Facebook leads the way
Facebook (NASDAQ: FB) offered to buy Snapchat in late 2013 for $3 billion, but the social video darling shot Mark Zuckerberg down. It was easy to laugh at Snapchat for kissing that kind of payday away, but does anyone remember what happened to Facebook when it turned down a $1 billion buyout offer?
It was 2006 when Facebook rejected the $1 billion deal, and 11 years later it's a $386 billion company. I guess one can say that Facebook made the right call.
Facebook was losing money and generating marginal revenue at the time, just as Snapchat was when it was approached by Facebook. It's true that Facebook waited until it was profitable for a few years before it went public in 2012. Snap is still losing money.
Snap is a smaller company than Facebook with 158 million daily active users. Facebook had 483 million active users at the time of its Wall Street debut. Facebook was profitable, with $3.7 billion in revenue a year earlier. Snap is losing money with $404.5 million in trailing revenue.
Snap isn't Facebook, but it is growing faster than Facebook -- and with its proposed market cap of $18 billion at its starting line it doesn't have to balloon into a $386 billion company in a couple of years to be considered a success.
3. Monetization will happen
Engagement breeds the opportunity for serious monetization. More than 2.5 billion Snaps -- Snapchat's name for short videos and images -- are created every day. Snapchat has successfully tied clip culture with social media in a new and successful way. Advertisers seeking out millennials know where they can find them, and it's just a matter of Snap turning on the spigot.
Advertising is still relatively new to Snap and its users, but just as we saw it evolve at Facebook one can only imagine how it will play out at a company where engagement is showing no signs of slowing down.
There will be no shortage of critics when Snap's IPO prices next Wednesday night and begins trading on Thursday. They will say the stock is overvalued, but we've seen what a fast-growing social media darling can do under the right circumstances. Let the boo birds sell Snap. Facebook was a broken IPO for a spell, too. It will be an opportunity for investors willing to buck the trend.
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