Skip to Content

Snap’s Biggest Challenge After Its IPO Is Slowing Growth

Shares of Snapchat’s parent company, Snap Inc., finally hit the market on Thursday after what was one of the most eagerly awaited initial public offerings in recent memory. The shares opened just before noon at $24, giving the five-year-old company a market value of $34 billion.

That’s pretty good for a startup that was widely ridiculed for turning down a $3 billion takeover offer from Facebook (FB) in 2013. But while day traders and underwriters will no doubt be happy with a one-day pop, anyone who is thinking about investing in the company long term has their work cut out.

In part, that’s because Snap—the company formerly known as Snapchat, which is also the name of its hugely popular messaging app—is unlike most other social-media or social technology companies in some important ways.

It’s a little like Instagram, in that users of the app exchange photos and videos, and use stickers and other features to personalize them. It’s a bit like Facebook, in the sense that it’s about connecting users with their network of friends. And it’s also a little like GoPro (GPRO), in that it refers to itself as “a camera company” (Snap recently introduced sunglasses with a built-in 60-degree video camera).

At the same time, however, Snap has also carved out some unusual territory when it comes to social media. Although some of its newer features have moved away from its early focus, it is still a company that built a huge user base by using messages that automatically disappear—what some call “ephemeral” messaging.

Get Data Sheet, Fortune’s technology newsletter.

All of this is fascinating to sociologists and media experts, or those who are trying to understand millennial behavior. But what investors in a public company care about is growth, and lots of it. Will Snap be able to generate enough to make the market happy?

Twitter (TWTR) is a great example of what happens when your growth fails to satisfy investors—they leave in droves. The social-messaging company was a rising star immediately after its IPO in 2013, with a market value of close to $25 billion. Now, the company has spent three years in the red and has seen its user growth fall virtually to zero, and it’s worth just $10 billion.

In Snap’s case, there is already reason to be concerned. According to some estimates, Snapchat has seen the rate of its growth slow dramatically over the past few months. Some fear that the service may have maximized its reach already, meaning it might continue to be valuable to a core base of users, but that it won’t have enough appeal to expand much.

A number of observers believe that at least some of the slowing down of growth at Snap is due to competition from Instagram, which is owned by Facebook. One of the most popular features of Snapchat is its Snapchat Stories, which allows users to bundle images and videos into a short collection about a topic or theme.

Instagram copied this feature wholesale last fall, right down to the name, launching Instagram Stories with virtually the identical feature set. Instagram CEO Kevin Systrom even credited Snap with inventing the format.

There are signs that this took some of the wind out of Snap’s sails, particularly when it comes to brands and celebrities, who use the platform as part of their marketing or social outreach. According to Facebook, about 150 million people use Instagram Stories daily, which is roughly equivalent to Snapchat’s daily users.

Not content to just duplicate Snapchat Stories inside Instagram, Facebook also recently added something similar to WhatsApp, the other messaging app it owns. WhatsApp, which started as an SMS replacement for users outside the U.S., has 1.2 billion users.

There’s no question that Snapchat carved out a significant user base with its unique blend of features, and it has done far better at generating revenue from those features and expanding that base than many people thought when it rebuffed Facebook’s offer.

The risk now is that, having identified that market, Snap could lose it to Facebook, by way of Instagram and WhatsApp. One caveat is that the giant social network has previously tried and failed multiple times to compete with Snapchat by duplicating features, and even launching standalone apps designed to serve the same market.

Most of those failed miserably. But Instagram is something different—it had a large and growing user base even before Facebook bought it, and that growth has continued since, thanks to Facebook’s resources. And now it has features that theoretically make it a compelling competitor.

It’s not just that users might migrate from Snapchat to Instagram, it’s that any slowdown in growth is going to cause concern among the advertisers that Snap is relying on to generate all the revenue investors are likely to expect. Some of those brands are already concerned about the engagement (or lack of same) that Snapchat users show with ads.

Of course, it’s possible that Snap may have a plan that builds on its ambitions as the camera company of the future (whatever that means in 2017), and strikes out in different directions that are more difficult for Facebook or even Instagram to duplicate. But those are fairly slim hopes to pin a market valuation of more than $34 billion on.