A billboard with the logo of Snapchat above Times Square in New York. Thomson Reuters Snapchat, maker of a free mobile app that lets users send videos and messages that disappear in seconds, is struggling to gain traction with advertisers, fueling investor concern that its $16 billion valuation isn't justified by a business that hasn't yet shown it has a steady source of income.

Even in a world in which upward of 140 private companies are reckoned to be worth $1 billion or more, Snapchat's outsize value stands out. Fidelity's decision to slash the estimated value of its Snapchat stake by 25% in the third quarter exacerbated concern about the company's ability to meet advertisers' expectations.

For Snapchat advertisers, the question is whether prices that can reach more than $500,000 for some ads is worth it when the company lags competitors in targeting specific consumers and measuring how ads perform.

"If Snapchat doesn't get that figured out, they're in trouble," said Nick Godfrey, chief operating officer at Rain, a digital strategy agency.

Snapchat lost more than $128 million in the first 11 months of 2014, according to a financial statement leaked earlier this year, which also showed Snapchat had revenue of $3.1 million. Its advertising business began in mid-October. The tech media outlet Re/code estimated that Snapchat's revenue could reach $50 million in 2015, citing sources familiar with the company. Snapchat doesn't comment on its revenue or its losses.

The company has raised $1.2 billion from investors, ample resources to develop its advertising techniques. But time may be limited as the company is in early discussions for an initial public offering, according to sources. Snapchat's $16 billion valuation was calculated at its most recent funding round in May based on how much investors were willing to pay for shares.

More than 100 companies, including General Electric, McDonald's, Nike, and Coca-Cola have advertised on Snapchat to capture the attention of the app's predominantly young audience — 60% of users are ages 13 to 24. More than 100 million people use Snapchat to watch 6 billion videos daily.

So far, many advertisers have had a lukewarm response to the results.

Toyota earlier this year launched an ad campaign on Snapchat for the Corolla, targeting young drivers buying their first car.

It ended that campaign and isn't yet sure whether Snapchat will be a useful partner until it offers better targeting capabilities and data, said a Toyota representative who declined to be identified because he's not authorized to speak on the matter.

General Electric signed up for a second ad campaign that will run for two weeks during the holidays even though Snapchat still lags other social media in its array of offerings, said Sydney Williams, GE's manager of global social-media marketing.

"I'm looking forward to Snapchat coming out with a little more in-depth analytics," Williams said, though Snapchat has not offered a timeline for improvements.

Still, "the numbers and engagement on the platform are staggering," Williams said. "This isn't a platform that we can walk away from."

Advertisers can target their ads based on gender and location of Snapchat users, and occasionally age, but little else, Snapchat said. Advertisers say they know little about their ads' reach and effect. On Facebook, by contrast, companies can target consumers with ads based on users' hobbies, interests, employer, and political leanings.

Disaster

Though Coca-Cola's first ad campaign on Snapchat was a disaster — 75% of the audience that viewed the ad skipped it after just three seconds — it has run successful ads since and plans to continue, said Emmanuel Seuge, senior vice president of content for Coca-Cola North America.

"Snapchat has earned a seat at the table in terms of the options that we look at for consumer engagement," Seuge said.

The San Francisco-based Benefit Cosmetics, which sells makeup and skin-care products, is discussing advertising on Snapchat next year, but it needs to see more analytics before doing so, said Claudia Allwood, director of US digital marketing at Benefit. The company is unwilling to write Snapchat a check until it can get more sophisticated data on its viewers, she said.

A spokeswoman for McDonald's declined to comment. Nike did not respond to a request for comment.

Snapchat is working with advertising clients to evolve and is constantly trying to strike a balance between satisfying advertisers and protecting users' privacy, said Mary Ritti, vice president of communications.

"It's early days and we're really focused on building long-term relationships with brands," Ritti said. While the four-year-old company lacks the technological sophistication of Facebook, which began advertising a decade earlier, Snapchat's slimmed-down offerings also reflect its decision to avoid bombarding users with ads.

Snapchat is also working with market-research firms to help advertisers better understand whom their ads are reaching, the company said.

Tom Edwards, chief digital officer of agency business at Epsilon, said that while about a half dozen of his advertising clients had held discussions, none had yet signed with Snapchat.

The high prices for ads that aren't strongly targeted were often the deal breaker.

"Snapchat fits into that 10 to 20% of a marketing budget that is for experimentation only," Edwards said. "The question is whether brands will continue paying the premium prices."

The slow progress has some investors impatient. One portfolio manager at a large US mutual fund, who was not authorized to speak publicly, said there were concerns about Snapchat's revenue growth and Facebook had been siphoning revenue away from Snapchat.

Facebook in the latest quarter posted $4.3 billion in ad revenue, with 78% of that coming from mobile, up from 66% a year ago. It has 2.5 million active advertisers.

Priced to perfection

Young startups are not expected to be profitable, but the combination of Snapchat's high valuation and losses puts it "in a class by themselves," said Anand Sanwal, CEO and cofounder of the venture-capital data firm CB Insights.

"These unicorns are sort of priced to perfection. They are getting up-front credit for future year growth," Sanwal said, referring to the term for private companies with valuations of at least $1 billion. "But if you have a misstep, which it sounds like Snapchat had, then you don't leave yourself a lot of room for another mistake."

Also competing with Snapchat are Instagram, which uses data from its parent company Facebook to target ads, and Twitter, which is expanding its video ad offerings. An eMarketer survey in October ranked Snapchat last among major social-media companies for its return on investment for advertisers. Another study published by the technology and market research company Forrester Research in December ranked Snapchat 11th out of 28 social network and communication apps for consumer engagement, behind Pinterest and Yahoo Mail, with users checking the app an average of three times a week.

The company disputes the Forrester findings, saying it has since added new features and engagement is up, but declined to offer specific numbers. Investors who are willing to wait three to five years for Snapchat to develop its ad business are likely to see a payoff, but "if they are looking for an exit tomorrow, there is probably a cause for concern," said Carrie Seifer, president of digital, data, and technology at Starcom MediaVest Group.

(Additional reporting by Timothy McLaughlin in Boston and Jessica Toonkel in New York; Editing by Dina Kyriakidou and John Pickering)