A minor hubbub on Twitter (Nasdaq: TWTR) last week ignited speculation that Twitter was going to buy Snapchat. I tried to put that speculation to rest by pointing out that Snapchat’s most recent valuation of $10 billion makes it 40% of Twitter’s entire market capitalization. Put simply, Snapchat is just too big for Twitter to buy.

In fact, I see a Snapchat IPO as the logical next step for the social messaging company. With a recent round of funding raising the company’s valuation to $10 billion, it seems only a matter of time before investors start itching for an IPO so they can cash out.

You might be wondering what Snapchat even does.

snapchat-ipo

Snapchat is a social messaging app through which users send messages to each other that disappear after a short period of time.

As of August the service had 100 million monthly active users and, as of July, 71% of its users were under the age of 25. In February it was reported that 77% of college students use Snapchat daily.

Those are pretty powerful numbers, especially if you’re attempting to advertise to an audience of tech-savvy millennials. Not surprisingly, Snapchat has begun working with brand partners to display advertising content in-app, a potentially huge source of revenue.

Snapchat recently announced Snapcash, a partnership with the credit-car processing firm Square through which users can instantly send money to each other via Snapchat. It remains unclear what the revenue model is here, as the service is currently fee-free for users. It might just be a way for Snapchat to prevent losing users to competing mobile payment and messaging services.

Snapchat CEO Evan Spiegel is rumored to have turned down a $3 billion offer from Facebook (Nasdaq: FB) founder and CEO Mark Zuckerberg in 2013. Why would a 23-year-old turn down $3 billion from one of the most powerful men in social media?

It seems obvious to me that either Spiegel sees a future in which he is the CEO of a publicly traded company or that the venture capitalists who backed Snapchat are looking for a bigger payday than $3 billion.

Most likely, both are true. But either scenario alone points to an eventual Snapchat IPO.

Of course, Spiegel wants the fame and power of running a high-flying publicly traded technology company. And the venture capitalists giving Snapchat millions of dollars want to see huge returns on their investments. If these investors didn’t think $3 billion from Facebook was enough to sell Snapchat outright then I’m inclined to think they intend to use the stock market to exit their investments.

With a valuation of $10 billion I wonder who would be interested in buying the messaging service outright. I doubt Facebook would be interested north of $10 billion if it wasn’t able to seal the deal at $3 billion. Perhaps a giant like Google (Nasdaq: GOOGL) or Microsoft (Nasdaq: MSFT) will absorb Snapchat just to stay relevant with young users.

Yahoo (Nasdaq: YHOO), with more than $5 billion in cash proceeds from the Alibaba (NYSE: BABA) IPO burning a hole in CEO Marissa Mayer’s pocket, could also try to buy Snapchat. We know Yahoo is at least interested – the company is reported to have ponied up $20 million in Snapchat’s recent funding round.

But I see higher aspirations for Spiegel and his venture capital backers at Kleiner Perkins Caufield & Beyers. That venture capital fund has invested in Facebook, Groupon (Nasdaq: GRPN), Twitter, Uber and Zynga (Nasdaq: ZNGA), four of which went public.

Kleiner Perkins also invested in Waze, Nest and Dropcam, all of which were acquired by Google when they were much smaller than Snapchat has become.

Frankly, I don’t see anything but a Snapchat IPO being big enough for Spiegel or for his VC backers. I expect a Snapchat IPO in late 2015.

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Published by Wyatt Investment Research at