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Snapchat, one of the most popular messaging and social media apps on the market today, humbly began as a class project by former Stanford University students Evan Spiegel (now CEO), Reggie Brown, and Bobby Murphy.

Launched officially in 2012, Snapchat allows users to take photos, record videos, add text and drawings, and send them to a controlled list of recipients. These photos and videos disappear within 1-10 seconds—the amount is up to the sender—after the recipient views them.

What Makes Snapchat So Popular?

You know you’re doing something right when huge tech corporations begin copying all of your ideas. Giants like Facebook (FB - Free Report) and Microsoft (MSFT - Free Report) have spent the better part of four years trying to emulate Snapchat, debuting new tools and features that are shamelessly similar to what the startup is known for.

What makes the app so compelling?

Ever since its debut, Snapchat has steadily climbed the social media ranks, having gained the top spot among teenagers over Twitter (TWTR - Free Report) , Facebook, and even Instagram. According to Mashable, who cited a Piper Jaffray study, 6,500 U.S. teens were polled “to see what they felt was the most important social network, and Snapchat took 28% of votes. Instagram came in close-second with 27%, followed by Twitter and Facebook.”

Over the last year or so, Snapchat has been launching new unique feature after new unique feature, introducing things like Snapchat Discover, expanding its video and picture filter library, and partnering with events like the Oscars, where the app let its users watch live behind-the-scenes footage of the red carpet and the actual show.

Teenagers love Snapchat, and teenagers are a coveted demographic for any tech company. The study both demonstrates Snapchat’s incredible ability in capturing this fickle group of people, as well as why teenagers prefer this kind of digital platform.

Ephemeral Engagement

Snapchat is a social, ephemeral experience that favors photos and videos over text-based media, and the company has made these qualities a priority in its development and business model. Engagement is not new for social media applications. In fact, it is very important to all social media companies, as engagement is the driving revenue factor, besides advertising. Snapchat, though, is approaching it in a completely different way.

Harvard Business School (HBS) Professors Marco Iansiti and Karim Lakhani offer an interesting perspective on this idea. In an introduction to the elective course “Digital Innovation and Transformation” presented in HBS’s Digital Initiative, Iansiti and Lakhani argue that Snapchat is “not just a messaging system, but also a social network, community, and an ad platform.”

Most importantly, Snapchat is an ephemeral social network, community, and ad platform. Their unique, yet increasingly popular application method is a major contributing factor to their success.

Iansiti and Lakhani continue, arguing that “Snapchat provides a window into this challenging question: what drives value creation and capture in today’s digital economy?” In other words, Snapchat offers a business model perfect for our current digitized economy, monetizing ephemerality in an innovative way.

Advertising & Video

Not only is Snapchat monetizing ideas, but it is also attempting to make money off its intensely high user base—the company has roughly 100 million daily active users—by introducing transient advertisements that disappear after a set amount of time.

This is a basic, yet clever, business move for the company. The combination of a large user base and high daily activity is a goldmine for advertisers. Snapchat recognizes this, and smartly charges an astounding $750,000 minimum for a day of advertising. By charging per day instead of the usual per click, the company is letting go of the typical internet advertising model.

The price may be staggering for some, but because of Snapchat’s huge, engaged audience, their early ad products have attracted big-name buyers like McDonald’s (MCD - Free Report) , Samsung , Macy’s (M - Free Report) , and Comcast (CMCSA - Free Report) -owned Universal Studios.

Video is another medium that Snapchat is capitalizing off of. According to a recent Bloomberg report, Snapchat is now getting around 10 billion video views a day, with more than a third from its “Stories” feature. This figure is impressive because Snapchat is mobile-only. In comparison, Facebook’s last reported video count was 8 billion daily views, which includes both mobile and desktop traffic.

The issue of what counts as a video, however, may be a potential problem for the app going forward. Snapchat’s videos are only a few seconds long, and most of the videos disappear once they are viewed. The company will need to clarify what they see as a video view in order to accurately paint a convincing picture.

Problems to Consider

Despite all of the company’s positive aspects, Snapchat does not come without controversy. Because of its ephemeral platform, Snapchat has been associated with sexting, a news topic that garners wide public attention whenever reported on. To some, the app is a perfect tool for sexting, as any inappropriate content quickly disappears.

The company has also been caught in racial controversies. On April 20, the unofficial marijuana holiday, Snapchat released a new face filter meant to make users look like late reggae legend Bob Marley. The filter adds a Marley-style hat, dreadlocks, and darkens users’ skin town, which had some people dubbing the filter as a form of digital blackface.

And later this year, Snapchat released a filter lens that caused users’ faces to look like caricatures of Asian people, with shut eyes and rosy cheeks. Snapchat told The Verge that “the lens was inspired by anime, and was meant to be playful.” It was eventually taken down, and will not be put back into circulation.

The company has also lost a number of executives after brief stays, with revenue boss Mike Randall leaving after a short, seven moth stint. Before Mr. Randall, Snapchat lost Peter Magnusson, who was the VP of Engineering after six months. As an IPO conversation heats up, Snapchat must make sure not to lose any other of its high ranking executives.

IPO Buzz

To date, Snapchat has raised a total of $2.4 billion in 6 rounds of equity funding, with help from companies like Alibaba (BABA - Free Report) , Tencent Holdings (TCEHY - Free Report) ), Yahoo (YHOO - Free Report) , and a number of other private firms. Right now, this puts its valuation at about $17.8 billion.

In 2015, Mr. Speigel told Re/code at its annual conference that “[the company] needs to IPO. We have a plan to do that.” He did not give details on when an IPO would happen, but added that “an IPO is really important.”

Now, it appears the app’s newly named parent company, Snap Inc., is getting serious about putting a plan together for an IPO. According to Bloomberg, the company has chosen Morgan Stanley and Goldman Sachs to lead its market debut. An IPO that could value Snap Inc. at roughly $25 billion.

Snapchat has also been making strategic business decisions over the past few years that could make their IPO even more of a blockbuster than it is bound to be. Back in 2013, the company caught the attention of both Facebook and Alphabet Inc.’s (GOOGL - Free Report) Google division. They offered to acquire Snapchat for $3 billion and $4 billion, respectively. In a bold, but smart move, Snapchat turned down both offers, with attention from investors rising exponentially as a result from the decision.

While it has lost a few executives, Snapchat has also made some high-profile hires that could be viewed as IPO preparations. Late last year, the company hired Imran Khan, the Credit Suisse banker who led Alibaba’s blockbuster IPO in 2014; he is now the Chief Strategy Officer. Khan joins other prominent hires such as Emily White, formerly of Instagram and Facebook, as COO, and Jill Hazelbaker, who is known for her PR work for Google, former NYC mayor Michael Bloomberg, and U.S. Senator John McCain.

An IPO for the Ages?

An IPO for Snapchat would be a great thing. It has molded itself as a company for the digital age and technology-grounded economy, and huge corporations want in. If you followed the 2016 Summer Olympics at all, you most likely saw that Snapchat showed highlights of the games, marking the first time Comcast agreed to share any video of the games.

Snapchat’s primary demographic, smart advertising strategy, and ephemeral business model makes the company quite the IPO catch. Its valuation could definitely spike even higher, putting the company’s potential worth at an amazingly high price. Snapchat, however, must seriously evaluate all of its existing problems, and will need to generate substantial revenue in order to present a compelling IPO investment rationale.


Interested in IPOs? Check out the special edition of Zacks Friday Finish Line, where Editor Maddy Johnson and Content Writer Ryan McQueeney interview Kathleen Smith of Renaissance Capital about the IPO market in 2016.

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