Snapchat Prepares for an IPO — What You Need to Know

Snapchat has filed initial paperwork to go public. Here’s why the implications of a Snapchat IPO may be bigger than you think.

In 2013, Snapchat founder and CEO Evan Spiegel reportedly turned down an offer from Facebook (NASDAQ:FB) to buy the messaging app for around $3 billion. The founder, who was 23 years old at the time, raised more than a few eyebrows for rejecting the offer.

But Spiegel’s bet has since paid off as the social network’s valuation has soared. And now his bet may pay off even more handsomely. Snapchat has reportedly just begun the process for an initial public offering. Here’s what investors should know about Snapchat’s purported IPO.

Snapchat is targeting an IPO in the first quarter of 2017

Snapchat will sell shares of its company, Snap Inc., as early as March, Bloomberg reported on Tuesday, citing “people familiar with the matter.”

Snapchat filed confidentially for the IPO, according to Bloomberg. Since Snapchat is expecting less than $1 billion in revenue this year, the company qualifies for an option to initially provide an IPO prospectus privately to regulators. It only has to reveal a public prospectus closer to the public offering.

The IPO will be big

While Bloomberg admitted there are still uncertainties surrounding the IPO, one thing seems almost inevitable at this point: This is going to be a very big IPO.

Snapchat could price its initial public offering at a valuation of $25 billion to $35 billion, Bloomberg reported. But Bloomberg’s sources also said the “valuation could reach as much as $40 billion.”

Even a more conservative offering likely would value the company well above Facebook’s $3 billion offer in 2013. Earlier this year, a $1.8 billion private funding round valued the social network at $18 billion, suggesting there’s already a considerable appetite for the company’s stock.

Snapchat is growing incredibly fast

Ahead of its IPO, Snapchat’s revenue is soaring. The company reportedly expects to generate around $350 million in advertising revenue. This is up from $59 million in 2015. Going into 2017, Snapchat expects revenue of as much as $1 billion, according to The Wall Street Journal (WSJ). But WSJ reports that Snapchat continues to lose money, “focusing on revenue growth and finding ways to make money off its user base.”

For some context, Twitter (NYSE:TWTR) and Facebook had revenue of $108 million and $3.7 billion, respectively, in 2011. Today, the trailing-12-month revenue for each company is $2.5 billion and $24.7 billion, respectively.

But investments in the two social network stocks have fared very differently. Twitter is now trading below its IPO price, and Facebook stock is up more than 200% since its IPO. Further, Twitter continues to lose money, with a loss of $380 million in the trailing 12 months, or $0.55 per share. Facebook, on the other hand, has seen its net income soar, with a profit of $7.5 billion in the trailing 12 months, or $2.59 per share.

Facebook and Snapchat are direct competitors

Snapchat’s IPO will be of particular interest to Facebook investors because Snapchat and Facebook’s Instagram are undoubtedly vying for a similar audience.

The head-to-head competition between Snapchat and Instagram became particularly evident when Instagram launched Stories, a feature enabling users to create a story of their day throughout their days, in August. The new Instagram feature, which was almost an exact replication of a feature of the same name on Snapchat, proved to be a raging success. Facebook said in its third-quarter earnings report that Stories has garnered 100 million daily active users.

For now, Instagram has a significant lead over Snapchat. Instagram has over 300 million daily active users — twice the number that Snapchat reportedly had earlier this year. But some investors may be concerned that funds raised in a Snapchat initial public offering could help catalyze the smaller platform’s growth and potentially even threaten Instagram’s dominance.

Twitter should watch out

Twitter investors, too, might want to keep an eye on a potential Snapchat IPO. While Snapchat’s offering differs immensely from Twitter’s news-focused platform, Snapchat has notably made moves into news by compiling user-posted videos into live event coverage. Further, it’s worth noting that Snapchat’s 150 million daily active users, reported earlier this year, is above Twitter’s estimated 140 million daily active users. So Snapchat isn’t necessarily an underdog.

Snapchat wants to be more than Snapchat

After an IPO, it’s likely that Snapchat’s ambitions will reach beyond a chatting app. The company first made this clear when it changed its name to Snap Inc. last month and launched its first hardware product, Spectacles.

SNAPCHAT SPECTACLES. IMAGE SOURCE: SNAPCHAT.

Priced at $130, Spectacles are sunglasses capable of recording 10-second snippets of video. While the product itself could end up more of an overhyped gimmick than a game changer, it at least gives weight to the company’s aspirations beyond Snapchat.

Spiegel explained the new direction in a blog post:

When we were just getting started it made sense to name our company Snapchat Inc., because Snapchat was our only product! Now that we are developing other products, like Spectacles, we need a name that goes beyond just one product — but doesn’t lose the familiarity and fun of our team and brand.

By tapping into new funds from an IPO, Snapchat will almost certainly double down on these “other products” it is developing.

While it’s always possible something could derail a Snapchat IPO, this news suggests a 2017 public offering is likely.

Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.