I have been reading articles about Snap recently about their upcoming IPO so I thought I would see if I could find any documents on the firm. I found their s-1 and started reading it and its pretty interesting. I am just wondering how would you go about valuing a company like this? Obviously future cash flows are super hard to predict so a discounted cash flow would be difficult. There aren't really any companies that do the same thing so comparable companies are out the window. I heard the banks are pitching the company based off of the fact that the founder, Evan Spiegel, is some sort of prodigy... But seriously I mean how far can you go on a valuation off of that?
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well they have financials that are private so you would use those and maybe slap on a few assumptions based on ipo's by similar companies?
User base and growth/retention in that base.
The Investor's Podcast with Bill Miller comes to mind (I can't post the link, but you can easily Google it).
Wall Street is so used to looking at forward earnings to get a sense of valuation. This will not work for many high growth companies, though. A discounted cash flow is one way to do it, but there's mounting uncertainty regarding cash flow potential the further you have to project out. In any present value estimate, the more and longer we project negative cash flows, the more important top line (i.e., gross profit) growth becomes.
Bill Miller talks about he values Amazon and Tesla. While not Snap Chat per say, he provides a generalized framework from evaluating a company that is growing and investing but shows negative earnings. He points out that gross profit (vice earnings) is a purer indicator of profitability for companies which invest heavily into future growth. Interestingly, he also equates top line growth with incremental return on invested capital, and then adds that to cash flow yield. I don't really understand how that is mathematically sound, but it does provide a decent heuristic if you're trying to get at "what cash flows would be if the company stopped investing in growth". More robust approaches are available, but they take some work (this is the essence of Stern Value Management's Economic Value Added (EVA) framework).
So, top line growth is key. User base growth, retention rates, et cetera are simply KPIs to expose the underlying drivers of growth. They are not, in of themselves, the end all.
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