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Snapchat’s $25 billion initial public offering, explained for people over 30

American Magazine Media Conference - Day 1
Snapchat co-founder Evan Spiegel
Photo by Larry Busacca/Getty Images for Time Inc

Snapchat is working on an initial public offering, which would allow members of the public to become investors in one of the internet’s hottest startups. That’s according to the Wall Street Journal, which reports that Snapchat expects to value the company at around $25 billion.

If you’re under 30, you’re probably excited at the prospect of one of your favorite apps getting some recognition from Wall Street. If you’re over 30, on the other hand, you’re probably bewildered that an app you’ve never used could possibly be worth $25 billion.

The big question for Wall Street is going to be what Snapchat’s extremely lopsided age distribution means for the app’s future growth. The optimistic view is that Snapchat is a general-purpose app that — like Facebook a decade ago — will simply take a few years to filter up from young people to their grandmothers. The pessimistic view is that Snapchat will never broaden its appeal beyond young people, and may even wind up being rendered irrelevant as fickle teens move on to the next communications app.

What is Snapchat?

Again, if you’re under 30, you can skip to the next question. For everyone else, Snapchat is a messaging app first released in 2011. Users of the original Snapchat used the app to send each other pictures — often selfies — that would disappear after a few seconds.

Like most new internet activities, this seemed totally pointless to the old people of the day, but teenagers loved it. Snapchat messages, known as snaps, were a quick and easy way for friends to let each other know they were thinking of each other. The informality and ephemerality of snaps made people more willing to send them on a whim — much as an earlier generation of teenagers would wave to each other as they passed in the hallway between classes.

By 2014, Snapchat had grown to more than 100 million monthly users, and it recently passed 150 million daily users, edging out Twitter.

Snapchat has steadily added new features. The app allows users to engage in both text and video chat. It added a new section called Discover that allowed professional news and entertainment brands (including Vox) to publish video content to Snapchat’s platform. Snapchat allows users to create stories — essentially slideshows of photos and videos that are available to friends for 24 hours.

Ultimately, founder Evan Spiegel believes that competing messaging apps are too complex and text-heavy, draining mobile chat of the spontaneity of face-to-face conversations.

Is Snapchat really worth $25 billion?

We don’t know that Snapchat is worth $25 billion. According to the Wall Street Journal, that’s how much Snapchat hopes its stock will be worth on the open market, but we won’t know if it’s right until the IPO actually happens.

But it’s not a crazy number by any means.

Snapchat has 150 million daily active users, making it more popular than Twitter by this measure. Twitter has essentially stopped growing, and the market values it at around $17 billion. So if Snapchat is about as big as Twitter and still growing, a valuation of $25 billion seems quite plausible.

Why is the company worth so much? The simple answer is that 150 million people is a massive opportunity for advertisers to reach a broad cross section of young people in the United States and around the world. Twitter, for example, generated $2.2 billion in advertising revenue last year.

When new online platform emerge, people often get hung up on the fact that they don’t seem to be generating as much revenue as existing online platforms. Snapchat, for example, is projected to generate $1 billion in ad revenues in 2017 — less than half the $2.2 billion Twitter generated in 2015. But revenues are a lagging indicator of success for a service like Snapchat. At this point, we have a very good idea how to transform millions of active users into millions of dollars of ad revenue. If Snapchat keeps attracting more users, generating billions in ad revenue will be easy.

The big question, then, is what happens to Snapchat’s growth in the future. If Snapchat keeps growing, $25 billion could wind up looking like a bargain. If growth stalls, Snapchat could find itself in Twitter’s predicament in the past few years.

Speaking as a 36-year-old whose job includes paying attention to apps like Snapchat, I’ve been struck by how few of my friends seem to use the service. According to a Vox/Morning Consult poll that will be released in a few days, 54 percent of people ages 30 to 44 say they never use Snapchat, compared with 26 percent of those under 30 and 82 percent of those ages 45 to 54. So Snapchat use really is heavily skewed toward the young.

Yet young people tend to love it, and after five years usage of the app is still growing. So maybe in a few years, we old people will find out what we’ve been missing.