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Snapchat’s IPO plans reveal it has the same major problem as Twitter

Snap Inc., the company formerly known as Snapchat, has filed to go public. It’s the first major U.S. consumer software company of its kind to go public since Twitter in 2013, and both Wall Street and Silicon Valley are paying close attention to how it unfolds.

According to Snap’s SEC filing, the company has succeeded at attracting a lot of young users who spend a lot of time on the app. That’s not news, but the documents also reveal Snapchat’s biggest problem: Its user growth is slowing dramatically.

Snap added 5 million new users between the third and fourth quarters of 2016, which is about 3 percent quarter-to-quarter growth. Though Facebook had a similar growth rate just before going public in 2012, its user base was much larger: Facebook had 483 million daily active users worldwide the quarter before it went public, whereas Snapchat now has 158 million.

Though Snap and CEO Evan Spiegel insist the company isn’t a social network, media company, or messaging application (the IPO filing says Snap is a “camera” company), Snap expects to ramp up its ad revenue over the next few years. But as Bloomberg’s Shira Ovide points out, the trouble is that Snap is now spending more money renting server capacity from Google than it’s generating in revenue, which makes it “unique in this regard compared with other internet companies.”

These concerns sound an awful lot like what critics said about Twitter around the time that company went public in 2013. Twitter has reliably struggled to add users since then, and that slowdown in user growth has corresponded with revenue plateauing since late 2015.

Similar to how Twitter emphasizes the news value and power of its users (remember @realDonaldTrump?) when probed about growth issues, Spiegel and Snap’s leadership have emphasized the quality and attachment that its users have to its service, especially teenagers. A big problem with this, however, is that data show Instagram has been gaining on Snapchat in this regard over the last few months. And as for the idea that all the Spectacles camera sunglasses hype speaks to Snap’s hardware savvy, the company conceded in its SEC filing (after aggressively damping expectations) that the glasses “have not generated significant revenue for us.”

So if Snapchat isn’t yet an explosively fast-growing social network, a uniquely powerful time-suck for teens, or a smash-hit consumer hardware business — then what is its value to investors? Expect Wall Street to think hard about this question once Snap shares start trading within the next few weeks.

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