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Without a doubt, the upcoming Snapchat IPO is one of the most awaited tech IPOs in recent times. Pitted to be the biggest tech IPO since the Alibaba IPO in 2014, the Snap Inc IPO has attracted a lot of attention from investors and analysts alike. While Snap Inc, which owns Snapchat, was initially expected to go public at a valuation of $25 billion, the company has reportedly slashed its ambitious target. As per recent reports, Snap Inc is now looking to go public at valuations ranging from $19 billion to $22 billion, with a share price in the range of $14 to $16 a piece. Does the slashed valuation make Snap stock attractive?

Slashing Snapchat IPO valuations a smart move.

According to recent reports, Snap Inc will now look to go public at a valuation of $19 billion to $22 billion, as it goes public under the ticker symbol SNAP on the New York Stock Exchange. Snap Inc's move to slash its previous seemingly overambitious target of $25 billion comes across as a very good move. Well, there's no denying the fact that the upcoming Snapchat IPO has generated a lot of investor interest - to the extent that some "overeager" investors even went ahead and bought shares of a similar sounding company, Snap Interactive (OTC:STVI), sending its shares 140% higher. And Snap Interactive's relatively paltry $50 million market cap may have something to do with it. Be that as it may, Snapchat's reported initial valuation target of $25 billion was way too ambitious, and there's no lack of consensus on that front. However, even the scaled down $19 billion target may not be attractive enough.

What you get if you buy into the Snapchat IPO.

For starters, a $19 billion valuation implies a price to sales multiple of 47. Look at some of the more successful IPOs in the past, like the Alibaba (NYSE:BABA) IPO, and it's easy to see a pattern. Alibaba was valued at about ~20 times trailing twelve month sales, while Facebook was valued at a P/S multiple of 28. Twitter's IPO valuation of ~45 times sales comes closest to that of Snapchat's, and we're all pretty familiar with how Twitter's story unfolded after the initial euphoria. To put things into perspective, Snapchat is expected to generate $1 billion in revenue in 2017. And even Snap Inc's 1 year forward P/S ratio of 19 to 22, is expensive, even by tech unicorn standards. Especially for a company that has massive-and-mounting losses to contend with. For 2016, Snap Inc recorded a net loss of $514 million, much higher than its revenue of $404 million for the year.

As we'd discussed in our previous coverage of the Snapchat IPO, the company's reliance on Google Cloud servers puts a lot of pressure on the company's gross margins, to the extent that it almost makes the rest of the income statement inconsequential. Snap Inc only managed to record "barely positive" gross margins in the second half of 2016, while it actually lost money even at a gross level in in the first half of the year.

Snapchat still has a rather small user base of 158 million Daily Active Users (DAUs) when compared to its closest competitor, Instagram. Instagram is not a 'camera company' like Snapchat, but it does pretty much the same stuff. Like the 'Stories' feature, which Instagram built (aped), taking 'inspiration' from Snapchat. And while Snapchat has about 40 million DAUs using its Stories feature, Instagram has managed to reach about 150 million DAUs using the feature, with its towering total MAU base of over 600 million users.

Further, as many reports have suggested, Snapchat's user growth has fallen sharply after Instagram Stories made its debut on the photo sharing app. Snapchat's slowing user growth is another big concern, with the sequential growth rate in Q4 falling to as low as 3.3% from as high as 17% earlier in the year. One can't help but draw parallels between Snapchat and Twitter, on multiple counts, one of which is the rapid slowdown in user growth. That said, even Twitter was relatively much better placed in terms of free cash flows during its IPO, with a -10% FCF margin, compared to Snap Inc's -113%.

Given how things stand currently for Snapchat in terms of its barely positive gross margins, mounting losses and its massively negative free cash flows, it's hard to see how the company will sustain itself financially. More so with user growth slowing substantially lately. Oh! And you don't get to say a thing. Not as a shareholder at least. With Snapchat deciding to use the multiple classes of common stock structure, IPO investors who will hold Class A shares, will have '0' voting rights.

Summing it up

Stellar top line growth is pretty much all that Snap Inc has going for it at the moment. Unless you decide to award some brownie points for creativity, for calling itself a 'camera company'. Losses haven't grown at the same as sales, but they have mounted nonetheless, growing at 38% YoY on an already big base. With its meagre gross margins, massive net losses and deep in the red FCF margins, its hard to see how Snap Inc will sustain itself financially. And with user growth slowing, even the relative less ambitious valuations of $19-22 billion come across as irrational. At best Snapchat's IPO may be a dream come true for Twitter, if the former does manage to list at those valuations. And as it stands, Facebook could gain the most from the upcoming Snapchat IPO, more so with Instagram's growing engagement levels.