Analyst: There's one really troubling thing about Snap's business right now

Snapchat evan spiegel founderYoutube/SnapchatSnap CEO Evan Spiegel.

Snap just released its prospectus for its IPO. The company is expected to list shares in March and fetch a valuation of $25 billion, sources say.

The big question for investors is, will Snap be another Facebook — a can’t-be-missed opportunity? Or will it be another Twitter, a much-hyped IPO for a company that has struggled to grow enough and, sources say, would like to sell itself but is hindered by its huge valuation (read: can’t find a buyer willing to pay that much)?

For the most part, Snap is looking more like another Facebook than another Twitter, analyst Rohit Kulkarni tells Business Insider. Kulkarni is head of SharesPost research. SharesPost is a secondary-market exchange, where startup employees and early-stage investors can sell their shares in their private companies. Kulkarni is known for his days as a Wall Street analyst at RBC Capital Markets and at Baird and Citi before that.

He likes Snap’s opportunity for revenue growth.

“Snap is very early in its monetisation. Snap earned $2.15 per user in North America versus almost $20 earned by Facebook per user recently,” he says. “Facebook has shown if you execute well, there is significant upside.”

So there’s tons of per-user revenue growth possible.

“Snap has been doubling on a year-by-year basis and that is one of the biggest positives,” he says.

By some measures, its revenue growth is even more: Snap made $0.31 per user worldwide in Q4 2015 and made $1.05 for Q4 2016. A good sign.

But even as revenue is skyrocketing, Snap’s losses have increased every quarter, too. “In fact, Snap hasn’t shown a hint of profitability. Revenue has grown six times and losses have increased 150% during that time,” Kulkarni added.

Snap lost a whopping $514 million last year and even warned investors that it “may never be profitable.”

And Kulkarni says there’s another really big red flag that makes Snap look like Twitter: “Snap’s user growth is generally slowing down, even in newer geographies outside North America and Western Europe.”

The company has blamed its sequential slowdown in user growth on “technical issues” related to recent product launches. But it’s worth noting that the 48% year-over-year growth of daily active users in Q4 2016 was actually not that much lower than the 50% in Q4 of 2015.

And while Snapchat’s overall international growth will be important in the long run, the company could impress investors if it can continue to expand in the most valuable markets like the US, Canada, and Europe.

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