How Quick will it Snap ? Valuation of SnapChat

Snapchat (recently renamed Snap Inc.) has filed for an IPO reportedly set for Q1 2017. Snap is seeking a valuation of $25 Bn according to reports at Bloomberg . The question arises if such a rich valuation of 25X Forward Revenue makes sense at all.

"At $25 Bn, Snapchat would have roughly the same value as Linkedin and HP."

What is Snapchat and how exactly is making money ? Snapchat primarily sells video ads. It also sells branded "filters" and most recently, a Discovery feature for mass marketers. Snapchat selling point is its demographics where users ages 18 to 24 account for 70% of the reportedly 235 MM it now has. If that holds true, Snapchat is the first of the major social network that has built upon a targeted -in this case, youngest- demographic base. Is that worth paying more for? Facebook did not have such a demo base when it went public in 2012.

It can be argued that any of those on Snapchat are already on the vaster platform (FB). Are they not consuming the ads on that platform ? If they're not, then Snapchat is a direct threat -competitor to FB.

The churn rate on Snapchat could be considerably higher than FBs or any other social network. People continue on FB as they age, while being on Snapchat may become a distraction to older adults. Older users are likely to stop sending self-erasing videos of themselves. Unless... Snapchat has something more to offer. Does Snapchat offer a more personalized experience than FB ? I'm not even sure i10 seconds videos are videos in the proper sense, or maybe they are videos in their own category, "ten seconds shorts".

It is obscure why advertisers would pay some of the highest rates in the industry for users who "have no strong brand loyalties" [user description according to advertisers' research]. Perhaps there is evidence to the contrary and those users engender early steadfast adoption, but I am not aware of it.

More of Snapchat : at Tracxn
- More at: https://wallstreetfinancier.blogspot.com/2016/11/…

 
Best Response

As I grow older, I care more about permanence. Maybe I am too old school (and half a decade outside the core user base), but I like to receive a video and play it several times over, and be able to come back to the best videos (hiking in Austria, friend's baby's first steps) over again. SnapChat as a way of communicating is conceptually interesting, but using it to me carries this feeling of ennui.

Where was I? Oh, yes. Snap is overvalued, clearly. The stock will probably still climb for a while on a combination of hype and actual growth, but at some point - where is the massive further implied growth? Where are the profits? Will a scandal about message permanence (such as a court case where Snap revives a photo off of its servers) hurt the company? What if users migrate to the next big thing? Vine in particular comes to mind, not a true comp, but directionally instructive.

Be excellent to each other, and party on, dudes.
 

A summary: "Well, Snap innovates while other tech companies don't, reaches millennials and young adults (though pretty no one else), and it's led by a smart guy. You shouldn't worry that growth has slowed way down, that our freaking COGS is bigger than our revenue (AT A SOFTWARE COMPANY), or that our margins are getting worse and our losses are getting deeper. It'll all be fine because teens are going to keep liking us and we can innovate. Oh, and I'm totally non-biased about this despite having all kinds of conflicts of interest."

My favorite part, and what made me lol when reading the s1 is when they say that they're non-voting shares. I would love to see the looks they get when they talk about that on the roadshow. Would be priceless.

 

we actually explored this idea of having members invest in WSO somehow through something like wefunder.com ...I think it would work well, just haven't gotten around to it and honestly, we don't need the capital. I would, however, LOVE getting more members of the community involved / vested in the future of WSO...maybe Silver Bananas will be worth something someday (like a discount to the valuation? :-)

If we were to sell a minority stake, it would just create the burden of reporting requirements that I'm not sure we're willing/ready to take on (yet).

stay tuned!

 

Unless they think of a better way to deliver their advertisements to users, I think this company will always remain negative cash flow. The consumer has too much power in viewing the ad on their platform, allowing them to opt-out right when it begins.

If users remain sticky with an ad distribution in between snaps, it will likely be better off. Stock will still go up on hype value.

-XSX

 

From the post: http://www.wallstreetoasis.com/blog/why-not-to-do-venture-capital

"Also not sure why Facebook is being discussed. VC firms that were invested made a killing. It was the MS and it's IB friends as well as the chasers and grandmas on the secondary market that really got housed. Anyways that company isn't worth more than 25B in my imo... it only made $1B last year and future free cash flows may actually decline. Facebook cannot advertise on mobile apps, it is going to face increased competition and everyone including pets and your grandma already have facebooks accounts...** I just don't see the growth. Lol @ people who think its a buy here at a $60B market cap.**"

Current Market Cap of Facebook: $387 billion ;)

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 

Money is seeking growth and pulling out of old staples. Snap is an attractive opportunity because it's "new" and "hyped". FB had a clear monetization/growth strategy by using its platform. Snap's platform has limited features and interactivity (by design) so it needs to make new products like Glasses to keep up growth. Google did this by branching out of Search. Snap's success depends on it doing the same.

 

Lets not even look at the financials yet or lack there of. FB has carbon copied everything Snap has 'innovated' (e.g. Stories, Filters, etc.) and rolled it out to a larger demographic. FB also has standing contracts and MSAs that make bolting on new advertising mediums easier. Snap threw up on the FB bid price (which even then was more than fair) and are now dictating a huge valuation with non-voting right share offer.

To the value investor, this is all a non-starter. To the growth investor--remind me how they view negatives earnings and thus negative P/Es?-- this is probably a non-starter. Tech IPOs, however, especially those run by superstar TMT desks have typically done well (look at the tech IPOs in 2016). Additionally, though they have FCF loss, look at the investing cash outflows. They are rising YOY and their revenues are skyrocketing. If they can lock consistent topline growth (basically get back their growth in users and attract advertising away from competitors) and get control of their cash flows (aka use the IPO capital to acquire Accretive targets, temper net working cap), then who knows, it might actually be worth looking into.

Also--lets face it--there is 'buzz' around this IPO. There will be dumb money pouring in and long only funds pouring in.

 

I just feel like their ad revenue can be so powerful because it's in video form and it's nestled in between your friends stories. They have the opportunity to make ads actually interesting/enjoyable/hell, interactive. Facebook hasn't evolved past the standard website-page ads that have been around since the 90's. Comparably, they put ads in between your friends news feed posts in a similar fashion to Snapchat (or other way around).

The only thing FB has going for it is first-mover advantage and the fact that their platform is simple enough to be used by older people. They're the dumb ones with lots of money who the advertisers want to target I'm sure. If Snap can mimic that userbase or simply continue growing their youth segment over the years (so that in 5Y people are turning 30 years old) the multiplier on their advertising has to be huge.

Basically my bet is that Snap can advertise very effectively with fantastic margins due to the nature of the app. Like I watched Arnold Schwarzenegger do some Q&A while lifting -- that shit was actually really cool and anything advertised to me during that time would have been super influential. Sure FB can flash png images in your face (pun intended) but I just love Snap's ability to engage.

"I did it for me...I liked it...I was good at it. And I was really... I was alive."
 

I disagree, Snap falls short of FB and Instagram in almost every way. A key aspect of the snapchat advertising model was the autoadvance feature that allowed a user to just continue tapping through stories. That way, ads could be sandwiched in between, and users view them without really any choice or care. Instagram did a great job with this strategy.

Second, Snapchat relies on advertisers who need to roll out their campaigns to as many people as possible. Snapchat has too much focus on private messaging and networking. You have to add friends to see their stories, and let's be real, how many people really scroll to the right to watch all the sponsored content? On the other hand, Instagram stories are automatically rolled out to every follower a company or celebrity has. It's way faster and better exposure, which begs the question of how SNAP is going to maintain their market share (not in terms of users but advertisers).

Lastly, their margins aren't so great. Any look at their s1 financials paint a pretty grim picture. I'd say at this point, unless they start biting Instagram back or really pouring investments into their wearables technologies, this stock is going to have one hell of a rocky future.

 

maybe I'm an idiot who doesn't understand VC, but I cannot fathom why people are so willing to pay for a company that's not yet close to a positive bottom line.

having stuff in the roadshow deck talking about stickers and filters seems a LOT like the tech bubble to me (companies being valued on price to click ratios, eyeball counts, and the like, instead of FCF and bottom line earnings)

also, he won't bang miranda kerr? dude...that's even loopier than your valuation

 

68x revenue for a company that burned $600M in operations is a crime against humanity.... and the pitch is that it captures 70% of a market that doesn't have any money anyway? You want to target a generation that mostly supported a batshit socialist to... sell consumer goods? Maybe they're so elusive to advertisers because they're not that interested in buying anything..

Overwhelming grasp of the obvious.
 
thebrofessor:

the only thing I'll take issue with here is the market not having money. the ones who are still dependent upon their parents are the single biggest influence on parental purchase decisions, so while they don't have their own money, that's absolutely a demographic to capture.

Sorry for bumping this, been busy.. fair enough point but I don't think Snapchat will be the innovator Google is. I'm not betting my money against it yet though.

Edit: some glitch caught this annoying flagging mess in my quote

Overwhelming grasp of the obvious.
 
thebrofessor:

hoping @Aswath Damodaran posts a blog about this a la Uber. could be an issue though because there's zero revenue.

and yes, I think it's crazy. for every Google, there's gaggles of failures. I'll stick to what I know best.

For every Google there's a googol of failures.

 

I'm sure KPCB doesn't throw $20mn bucks at something that doesn't have a plan to monetize, and at more than 100 million active users, at a $100 per user valuation with growth prospects it doesn't seem completely absurd

 

sort of like how they used to love pokemon

sort of like how they used to love tamagotchi

sort of like how they used to love beanie babies

sort of like how they used to love gameboy

sort of like how they used to love furby

sort of like how they used to love pogs

sort of like how they used to love tying flannels/sweaters around jeans when they rock their middle part & Nirvana shirt

sort of like how they used to love chain wallets & saggy jeans (jnco & plugg, anyone?)

sort of like how they used to love heely & soap shoes

 

Dude... two words: preferred equity. This is a small minority investment of preferred equity. It does not really imply a $10B valuation.

"'In summary, people are morons and who cares. Make a shit ton of money. I've never seen a Ferrari paid for by what people think.' - ANT" -rufiolove
 

Time will tell. Instagram at $1B looked crazy at the time but now looks like a bargain given how many more users they've acquired and how much engagement is still on the platform. When FB IPOed it had 0 mobile revenue and the stock tanked for a while on the assumption that they couldn't monetize well on mobile. Then they turned on native click to install targeted ads, which have done terrific and is on track to be a multi billion a year business.

Messaging is arguably the most coveted type of consumer business given how core it is. People use messaging services more often than anything else. And they always will. It's like oxygen. If you own messaging you can be an absurdly large company. That's why WhatsApp sold for what it sold for. That's why Snapchat is valued at what it's valued at. User growth continues to be a rocket ship. And engagement is still off the charts. Yes, the valuation is way ahead of where it is today, but there is definitely a scenario in which this thing could be worth multiples of that in a few years.

 

First off, the focus people have on Evan Spiegel's ability to get chicks based off this is fucking weird.

Now, onto the valuation. I used to be really skeptical, but I've started to become something of a believer. It goes beyond the growth of users and the sustained usage rates of its users. Sure, simple Snaps seem hard to monetize, but daily Stories now outnumber daily Snaps and are available for 24 hours. They're already starting to partner with brands and live events to curate stories from users. I know Electric Zoo did this over the weekend and there were a solid 5 minutes of snaps / videos shared from the event.

Even snaps themselves have some real potential as ads. On some level they're the ultimate version of display ads for the simple fact that they more or less require your attention via the "press and hold to view" mechanism of the app. It's simply another, "personal" way of connecting brands to consumers in some interesting ways.

$10bn might seem insane, but I definitely see a way for them to monetize. In fact, their pitch deck to advertisers / brands was leaked in early August. It's an interesting read, check it out here:

http://www.businessinsider.com/snapchat-pitch-deck-2014-8

 

Thanks for the link, very interesting.

While I won't comment on the actual valuation, I definitely see how they can monetize this. Just this weekend I was able to follow what was happening with EZOO in NYC since they had a live event stream. I thought it was super neat and could definitely see big events paying to share these live moments.

1 Billion stories viewed per day is pretty insane

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 

I agree with The King regarding ads and monetization. That being said, I don't see $10B worth. Facebook makes sense since it's a website that you see ads and can sell user data. Snapchat is online, basically a dick pick service and meant to be quick. I can see this thing making money, but nothing near this valuation.

 

A lot of these companies just reak of dotcom explosion 1.0. Are they worth something, definitely. Is snapchat currently worth $10B? Only because some greater fool will probably be willing to buy it (be that an acquirer or the public through and ipo) for a ridiculous amount of money, just like whatsapp was snatched up for $16B or whatever the exact amount. They could be truly worth that in the future and I suppose that anything is only worth what someone is willing to pay for it but these prices are outrageous in my opinion.

When I hear valuation methods based on new metrics or kpi's and not revenue/profit or asset based measures it just reminds me of the "new paradigm" valuations of the late 90's.

 

Regarding WhatsApp.

Zuck just paid for access to everyones phonebook and he paid 20% of what global SMS is worth. This is an absolute steal. The value of this deal is the same as Google buying YouTube all those years ago. Some of you clowns genuinely do not understand value because you cannot plug it into a spreadsheet and run a DCF model on it.

 

could not agree more. people who cite Google and Amazon and compare these new companies forget one thing: both of those companies had EXPONENTIAL revenue growth from the get-go. they weren't concept companies with a big user base but no revenue, they were relatively established and had been making money from day 1 (not profits, revenues). completely different than a company that has zero revenue from the beginning like snapchat.

the thing is when you buy a stock like Google in 04 or Amazon in 97 you knew what you were getting into, you were simply hoping they would turn the corner on profitability, you knew they could make money, it was just a matter of continuing that growth but getting a positive profit margin. they had an established strategy for sales (which drives the bottom line, remember that kiddies), whereas snapchat has given the market zero proof that they can capture revenue from their broad user base. unless I'm wrong and snapchat really does start a new paradigm, this will fuck over some investors.

 

No it is not crazy:

Please see the marketing material that snapchat is sharing with large brands and agencies. The user growth, stickiness (read: addiction) if off the charts. All of you donuts use Facebook/Twitter and were using it like cocaine addicts long before the IPOs of those businessses occurred. Snapchat is the exact same.

 

220k is pretty much negligible. Google raised their $25M Series A mid 1999 when they had no business model and essentially 0 revenue at the time. The reason they went from 0 to $20M in 2000 was their discovery of AdWords and how lucrative demand fulfillment through sponsored keywords is.

My overall point is that Google was similarly ridiculed as a free consumer product that could never make money. Never underestimate the power of hundreds of millions of engaged users. Snapchat could simply slap display banners on and easily make $1M per day at current CPMs (100M active users * 10 impressions per user which is actually very conservative since the avg user gets 20-50 snaps per day * $1 CPM), even outside of native ads, sponsored content, in app stickers, and all the other stuff they can put into the app.

 

It's hard for me to see this sort of business having the corporate lifespan necessary to provide 10BN in value. limited defense against competitor entrance + the cyclical nature of teen preferences + the significant technological turnover in this space = high probability this business is dead before it 'realizes it's potential'.

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 

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