Snap's low-ball IPO valuation shows it's trying to avoid the missteps of Twitter

Earlier today, Snap, the parent company of the messaging app Snapchat, set the market value for its initial public offering at between $19.5 billion and $22.2 billion. Though this errs on the cautious side of Snap’s initial $25 billion valuation (paywall), it still earns Snap a spot as one of the biggest IPOs in recent years.

With fears looming that it would follow in the footsteps of Twitter—a company that can’t seem to grow or make money—Snap has a handful of reasons to be cautious.

It needs to pay off Google and Amazon

Snap’s filings show that it has committed several billion dollars to Google and Amazon for cloud computing storage. “That’s their biggest single cost by far and so their ability to cover those costs over time depends very heavily on their ability to grow revenue significantly,” said Jan Dawson, chief analyst at Jackdaw. Snap’s filings suggest that with its rebranding as a “camera company” and the release of its Spectacles, it has plans to grow, but, says Dawson, “It’s still tied back to that growth issue—the problem is there’s no way to know how big Snap is eventually going to get.”

Tapering user growth

In its filings earlier this month, the company recognized competitor Instagram’s “Stories” feature—a Snapchat knockoff—could cause its business to suffer. Last month, Instagram Stories reached 150 million daily active users—almost as many as Snapchat—which it had acquired in four months, where Snapchat took four years. Snap also recognized that it has neglected Android phone users. It will have to serve them better to fight off a recent slowdown in its user growth.

Trouble turning a profit

In a survey by customer-acquisition firm Fluent, more than half of Snapchat users said they tend to skip in-app advertisements. The company has partnered with a growing number of publishers and media brands to publish news and entertainment through its two-year-old Discover feature, but it hasn’t been paying off for publishers.

Snap starts its roadshow tomorrow, during which it can reassess the company’s market value based on how confident investors are feeling.

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