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What’s Behind Snap’s Epic IPO?

Snap CEO Evan Spiegel sold investors a story, and from the looks of its debut on the New York Stock Exchange, it was one Wall Street wanted to hear. Its IPO closed its inaugural trading day with shares up more than 40 percent, and it continued to gain through midday Friday.

To some, it's a green shoot in a parched IPO market; to others, a symbol of how undisciplined the market has become.

Snapchat makes splashy debut on Wall Street 2:12

Despite exploding revenue, Snap lost nearly $515 million last year and has yet to turn a profit, but plenty of investors are willing to overlook that. "I don't think people are looking at that exact metric right now. They still consider this a growth story," said Jeff Zell, senior research analyst at IPO Boutique.

A Contender for Facebook's Crown?

"People are seeing the potential," said R "Ray" Wang, principal analyst and CEO of Constellation Research.

"There's been a lot of pressure for organizations to find these large P2P networks, and what we're seeing is Snapchat is probably one of maybe four companies that can compete directly with Facebook in the long run," he said.

"It's a demographic that's really appealing to advertisers," Zell said of Snap's 18-to-34-year-old core user base, but he added that now it's up to Snap to deliver continued growth of that audience. "Q4 was a struggle — they brought in new users, but at a lower percentage," he said. "People believed in the story, now it's about producing."

Not everyone has been sold on the story, though.

Related: So Excited About the Snap IPO!

"Its optimism should come with a dose of skepticism on the side," Jessica Liu, a senior analyst at Forrester Research, wrote in a report Thursday.

For one thing, pitching itself as the next Facebook is overly optimistic, she said. "That's not to say that Snap can't be a success, but it would do well to temper its expectations to the more realistic growth trajectories of pretty much any company other than Facebook."

Promising — But Unproven

"It has a promising and innovative advertising offering, but so far it is still mostly unproven and difficult to quantify its ultimate scale," Brian Wieser, an analyst at Pivotal Research Group, wrote in a research note.

Wieser valued shares at $10 on a year-end basis — a sharp departure from the roughly $27 at which shares were trading midday Friday. He argued that the promise of Snap's technological vision and coveted demographic were offset by risks ranging from an inexperienced management team to competition from other social platforms like Facebook to slowing user growth.

"It is significantly overvalued given the likely scale of its long-term opportunity and the risks associated with executing against that opportunity," he wrote.

Aside from growing revenue enough to make a profit, analysts also say the company needs to accelerate its user growth and broaden the scope of its offerings. "Snap will have to grow beyond the core model quickly to sustain this enthusiasm," said John Jackson, analyst at IDC.

Brian Hamilton, a co-founder of financial information company Sageworks, had a more specific calculation for what he said it will take for Snap to live up to its early share price explosion.

"To justify the value of this organization, you'd have to have the company increasing its sales by 50 percent for 10 years at a 20 percent net margin — and they're not even profitable," he said.

Throw Out the Rulebook?

To that point, some argue that the usual rules of valuing newly public companies shouldn't be applied to Silicon Valley, where startups can swim or sink based on technology that didn't even exist a few years earlier. This ability to build markets and generate demand — and profits — out of seemingly thin air makes the usual math immaterial, they say.

"We all know that Silicon Valley valuations are strange beasts that tend to exist outside the boundaries of convention," Jackson said. "It's not terribly strange that the market would express such enthusiasm for a fast growing audience aggregation play — one that's killing it with the sweet spot of the demographic market — with no obvious hope of profitability in the near or medium term."

Broader market conditions and sentiment also are likely to be propelling the stock higher. Snap's early, meteoric rise likely benefited from market conditions including a dearth of public offerings in 2016 and a hot — possibly overheated, according to some analysts — equities sector.

Snapping Up Any IPO

Demand for IPOs is high. IPO Boutique's data shows that there were only about 100, roughly half of the number of companies that went public in each 2015 and 2014.

"There's not as many companies going public so it's a classic situation where there's a certain amount of demand but not as much supply," Hamilton said, calling the current stock market conditions "frothy."

"In this environment, we're in a super-bullish market, just look at the conditions in which Snap went public," Zell said. "All the conditions are perfect for people to accumulate risk. Snap definitely took advantage of that as far as the timing of their IPO."

Note: NBCUniversal, parent company of NBC News, has a business relationship with Snapchat.