Snapchat 'will be bigger than Twitter, Yahoo and AOL with advertisers'

Snapchat could become more popular with advertisers than Twitter, Yahoo and AOL within three years, with the messaging app company forecast to bring in revenues of more than $3bn (£2.4bn) a year before the end of 2019.

That bullish forecast is based on advertisers targeting the youth audience that the disappearing photo app has seemingly cornered. More than half (51%) of video users on Snapchat are under 24, compared with 23% for Facebook and 17% for Google’s YouTube, according to Ampere Analysis.

Brands are also keen to see a true rival emerge to challenge Facebook and Google, which have recently come in for heavy criticism for their advertising practices. The two web giants currently account for 58% of the $141bn global mobile ad market.

“You often hear advertisers saying they are getting uncomfortable with such a large portion of ad spend going to just two players,” said Cathy Boyle, principal analyst at eMarketer, which produced the global mobile ad forecast. “If there can be a third or fourth player they are interested in spreading the wealth beyond the duopoly.”

WPP chief executive Sir Martin Sorrell recently referred to Snapchat’s potential to become a “third force” alternative but many investors and analysts remain wary of Snapchat’s future.

After a much-hyped stock market flotation earlier this month that valued Snap, the company behind Snapchat, at $29bn the company’s share price has steadily sunk. The shares soared from their $17 IPO price to $26 in two days, but are now back at just over $19.

“Snap is a promising early-stage company with significant opportunity,” said Brian Wieser, senior analyst at Pivotal Research in a note to investors. “Unfortunately, it is significantly overvalued given the likely scale of its long-term opportunity and the risks associated with executing against that opportunity.”

Wieser, who says Pivotal is a “cautious optimist” on Snapchat, said that its model for the business is “potentially stretched” at even a bearish target price of just $10 a share.

The list of issues and potential threats is extensive. Omnipresent is Mark Zuckerberg’s Facebook, which dominates social media with 1.2 billion daily users and owns Snapchat’s most direct competitor, Instagram.

Last summer, Instagram – which has 600 million users to Snapchat’s 158 million – launched a function called Stories, which is similar to Snapchat’s own story feature. Instagram Stories has already achieved 150 million daily active users. Instagram Stories’ launch intensified another concern: Snapchat’s slowing growth.

The number of Snapchat users grew by 14% and 17% in the first two quarters of last year. Following the launch of Instagram Stories, Snapchat’s growth slumped to 7% and just 3.2% in the final two quarters of 2016. Snap has blamed “technical issues” in the rollout of new products, but admitted in its IPO document that Facebook/Instagram would be a huge threat.

“Our competition may mimic our products and therefore harm our user engagement and growth,” Snap acknowledged.

While Snap’s IPO has made 26-year-old co-founder Evan Spiegel the world’s youngest billionaire with a $5.5bn fortune, his business remains heavily loss-making.

Snap raised $3.4bn at its flotation, giving it plenty of cash to continue to build on innovations such as its launch of video-capturing spectacles. But it lost $373m on its day-to-day business in 2015, and that figure spiralled to $515m last year.

One of the most highly publicised issues has been Snap’s decision to keep total control of the company’s voting rights with its founders and early investors. In its IPO filing the company said it believed it was the first US business to go public with shares that do not grant any voting rights to stock market investors.

“We … cannot predict the impact … the concentrated control by our founders may have on our stock price or our business,” the company said.

Corporate governance experts have advised potential investors to avoid Snap because of the voting rights issue. “It’s about accountability. If you give your money to someone you want to make sure they’re using it properly and can justify their actions back to you,” said Sarah Wilson, chief executive of investor advisory firm Manifest. “Power is handed over to a select few with the shareholders bearing considerable financial risk – remember those founders will be getting gold-plated pay schemes as well as their stock ownership.”

However, WPP’s Sorrell recently countered this view, arguing companies with dominant shareholders or owners – such as Snap, Facebook and Rupert Murdoch’s News Corp and Fox – that “offend” good corporate governance practices can take more risks and tend to perform better financially.

Snapchat’s $22bn market capitalisation is already double that of Twitter ($11bn), but it remains a minnow compared with Facebook ($393bn) and Google ($596bn).

It is undeniable that the digital darling is on to something – its users love it. Two-thirds of them check the app every day – and the average daily user visits the app 18 times a day, spending an average of 25 to 30 minutes a day sending snaps and watching messages from their friends, celebrities and advertising brands.

This level of engagement from a youth audience notorious for fickle attention has helped fuel a surge in revenues from $58.7m in 2015 to $404m last year and an expected $1bn this year.

Nick Baughan, chief executive of media agency Maxus UK, said the Snapchat opportunity is real but that advertisers also remain cautious. “It isn’t a case of the emperor’s new clothes, it is an exciting opportunity,” he said. “But the IPO came quite early, before advertising products have grown to full maturity.

“At the moment Snapchat sits firmly in most agencies and advertisers’ innovation [budget] pot. As responsible advertisers and agencies we need to make sure we are where audiences are. But there is no point in being innovative unless Snapchat can back it up with evidence-based innovation.”