The Snapchat IPO: It's All Downhill From Here

The initial public offering of Snapchat parent Snap (ticker: SNAP) gave Wall Street that sorely missed thrill last week. You remember: The hot, up-and-coming tech company finally making its way into the hands of retail investors.

You saw it with Alibaba Group Holding ( BABA) in 2014, Twitter ( TWTR) in 2013 -- and the company that truly started social IPO hype, Facebook ( FB) in 2012.

Snapchat didn't disappoint, either, putting up a gains of more than 40 percent in its first day, then following it up with a double-digit run on Friday, demonstrating that the market is more than excited about what SNAP might deliver.

But now that the market has already driven Snapchat up in its early publicly traded life, should you try to get a piece of SNAP shares?

Well, you can't really answer that without Wall Street's original social superstar: Facebook.

Facebook's legacy of legitimacy. Facebook could have ruined it for every other social network that dared to go public.

Part of that was the high-profile debacle that was the actual offering itself. Facebook shares, which listed on the Nasdaq, began trading a half-hour later than expected, and the Nasdaq later admitted to a technical error that caused numerous bungled and incomplete orders. That resulted in the Nasdaq paying out $62 million in reimbursements to investment firms, as well as $26.5 million for a class-action lawsuit. That also began a trend of big-tech IPOs -- including Twitter and Alibaba -- opting for the New York Stock Exchange instead.

Facebook also was dragged down amid allegations that Wall Street analysts concealed reductions in revenue forecasts before the company's IPO, which "led to accusations of selective disclosure of material information," Reuters reported in 2012.

[See: 6 Things to Know About Mark Zuckerberg's Manifesto.]

Also, despite the fact Facebook had pre-IPO revenues of $3.7 billion in 2011 and profits of roughly $1 billion, investors had two enormous concerns: CEO Mark Zuckerberg's lopsided prioritization of the user experience over monetization, and mobile adaptation was problematic, with Facebook banking on HTML5 rather than native apps at first -- something Zuckerberg later admitted was a mistake. And, of course, there were worries that Facebook -- like MySpace -- was just a fad.

But Zuckerberg proved every bit of that wrong, growing revenues 650 percent between 2011 and 2016, pushed heavily by mobile, which accounted for more than half of display ad revenues by 2013. And he erased any "fad" thoughts, turning Facebook not only into a high-interaction social media platform for people of all ages, but one of the 10 largest companies on the U.S. stock market.

If nothing else, Facebook has slayed the "it's a fad" dragon that Snapchat otherwise might have faced. We've seen a large social network go public before, and we've seen it work. It's why commentary like this tweet that made the rounds amid Snapchat's IPO: "SpaceX, $12 billion valuation: Launches 70m rockets into space and lands them safely. Snapchat, $20 billion valuation: Rainbow Filters."

That's clever and funny, but ultimately ignored by investors who see a real opportunity.

Snapchat versus Facebook: While Snapchat may have enjoyed the benefit of the doubt earned by its social predecessor, it also must deal with comparisons to Facebook -- and deal with Facebook itself.

On that front, it comes up a little lacking.

Snapchat entered its IPO after earning roughly $350 million in ad revenues in 2016. And Tom Taulli, editor of the IPO Playbook, says, "It helps that Snapchat is in the early stages of its development. This means revenue growth will be easy to juice up."

Sure enough, eMarketer expects that to more than double to $804 million this year.

That's the good news.

The bad news is that Snapchat lost $515 million last year. Worse, that loss was significantly wider than its 2015 deficit of roughly $307 million. And even worse than that, the company's own publicly filed documents says it expects "to incur operating losses in the future, and may never achieve or maintain profitability." That lone statement has drawn comparisons to another publicly traded social media platform: Twitter, which has never reported a GAAP profit, and is off 40 percent from its 2013 IPO price of $26 per share.

[See: 7 of the Best Stocks to Buy for 2017.]

That alone doesn't mean SNAP stock can't be a good trade in the short-term. After all, Amazon.com ( AMZN) ripped off an unthinkable 6,000 percent profit from its 1997 IPO through the dot-com bubble burst in late 1999 -- and it still was up more than 600 percent through late February 2002, when it reported its first-ever quarterly profit.

But Amazon's ability to climb amid losses and inconsistent profits was built on ever-expanding revenues and a belief that Amazon would unseat its rivals in the traditional brick-and-mortar world. Snapchat certainly doesn't seem likely to upend Facebook -- in fact, it looks like it could be the other way around.

"For the long-term, I'm much more skeptical," Taulli says. "Facebook is gunning hard at Snapchat, and there are already signs of an impact. Instagram has made tremendous inroads since introducing stories -- whose user base is nearly the same as Snapchat's user base -- during the summer."

In the second quarter of 2016, Snapchat grew its user base by a robust 17.2 percent to 143 million daily users. Facebook launched Instagram Stories -- considered to essentially be a clone of Snapchat -- in the middle of the third quarter, during which Snapchat's growth slowed to 7 percent (to 153 million users), then just 3.2 percent in the fourth quarter (to 158 million). TechCrunch's Josh Constine points out that "its growth rate actually slowed beneath that of Facebook, which grew daily users 4.2 percent in Q4 to reach 1.23 billion."

That's not worrisome. That's damning.

Will there be more gains in the short-term? Sure. Taulli points out that Snapchat is "really the only game in town right now" amid a dearth of offerings over the past couple years, and the total value on the stock market (because of locked-up shares) is really only about $4 billion, so it won't take much buying power to move the stock.

But Snapchat has a serious user growth problem that coincides with a new product by its primary rival. Snapchat also has no single headquarters, and instead a smattering of offices; the company itself says "we may be unable to adequately oversee employees and business functions." And shares have no voting rights. Yes, this keeps investors from essentially running Snapchat, but don't forget it was responsibility to investors that drove Zuckerberg to make Facebook into the profitability machine it is.

[See: 7 Things That Happened When Donald Trump Met With Tech Leaders.]

Snapchat might be high on post IPO buzz now, but sobering reality awaits.

Kyle Woodley is managing editor of InvestorPlace.com. He specializes in (and prefers investing in) exchange-traded funds. In addition to InvestorPlace and U.S. News & World Report, his work has appeared on MSN, Nasdaq and Yahoo Finance. Investing is his second love, with Ohio sports teams as his first. Naturally, this has warped his general perception of love, sparking (among other things) an unnatural affection for the Haddaway hit, "What Is Love?" Follow him on Twitter.