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Snapchat's IPO filing shows its advertising strategy is paying off

·West Coast Correspondent

Snapchat parent Snap Inc. filed to go public on Thursday afternoon.

With a valuation reported to be as high as $25 billion, Snap is expected to be the largest public debut of any US-listed technology company since Alibaba (BABA) went public in 2014.

Investors were able to get a closer look at several key numbers of the notoriously secretive company. According to its SEC filing, the company recorded revenue of $404.5 million and a loss of $514.6 million in 2016, compared to revenue of $58.7 million and a loss of $372.9 million for the year ending December 2015. This represents a year-over-year increase of more than 6 times.

And the company noted that it generates substantially all of its revenue from third-party advertising. In 2016, advertising revenue accounted for 96% of Snapchat’s total revenue.

Snapchat’s advertising products include Snap Ads and Sponsored Creative Tools like Sponsored Geofilters — images that creatively communicate your location — and Sponsored Lenses — which dress up your boring photos by, say, giving you a taco head.

Companies like Pepsi (PEP) and Taco Bell (YUM) have quickly realized the colossal opportunity to tap into young minds and their wallets, given that so many millennials use the app. And they’re getting tons of ordinary people to advertise their stuff — whether it’s Gatorade or tacos — for free. And it’s happening on Snapchat.

Snap CEO Evan Spiegel, P Photo/Jae C. Hong, File
Snap CEO Evan Spiegel, P Photo/Jae C. Hong, File

In its SEC filing, Snap contended that it has also excelled at targeted advertising. It cited an ad campaign with a long-form video attachment to promote deodorant for men. Snapchat said it wanted to ensure that the message reached males between the ages of 13 and 34, and market research firm Millward Brown verified that a whopping 88% of the people who saw the ad fell in the advertiser’s target demographic.

Additionally, over 60% of all Snap ads are watched with the sound on, confirming the idea that the advertisements are highly targeted and engaging to users.

Meanwhile, the company, in an effort to monetize its playful Lenses feature, has given brands an opportunity to create their own sponsored lenses. By partnering with brands like Spotify, Kraft (KHC) and bareMinerals, Snap enables users to interact with advertisers directly.

“The genius behind the sponsored lens is that Snapchat has created an advertising product that people actually want to see, use, and share,” notes Jefferies’ US internet research team.

Snap’s biggest boon is its biggest risk?

However, the fact that advertising is Snap’s sole money maker may worry investors. In the risks factors section of its SEC filing, Snap pointed out that most of the company’s advertising commitments are short-term and may not be renewed.

This risk, like others Snap mentioned, is tied to the reality that the majority of the app’s users are 18-34 years old.

“This demographic may be less brand loyal and more likely to follow trends than other demographics,” the filing said. “These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement.”

The filing acknowledged that it relies heavily on a teen and young adult user base that tends to be app agnostic and may quickly adopt the next big thing, whether that’s musical.ly or something else that hasn’t even been invented yet.

“Falling user retention, growth, or engagement could make Snapchat less attractive to advertisers and partners,” the filing noted, “which may seriously harm our business.”

Melody Hahm is a writer at Yahoo Finance.

Read more from Melody here & follow her on Twitter @melodyhahm.