Snap.Send.View.Gone. Snapchat

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Snap. Send. View. Gone. This has been the model for Snapchat since its creation by Evan Spiegel and Robert Murphy in 2011. Its success so far is undeniable. More generally, in the US 60% of users are under 34 and it’s the number one choice for social media among teens. Most of you reading this article will have at least used the app once, and a lot of you will be using it regularly. This market penetration hints at the power of the app. People don’t “photograph” a party, they “snapchat” it. And this universality is what Snapchat is now slowly using to dial up on the advertisement, which means revenue in the world of social media. One of the ways which you may have noticed is putting advertisements between stories. However, this is just one of the many ways.

Facebook made the move to fully monetize its service back in 2013 when it started integrating advertisements into its news feed directly, ditching the ignored side bar on the right and making its advertisements look just like any other post. Importantly, this integration meant that it could monetize the mobile platform as well, which had been depressing the company’s share price since it went public. Since then it’s share price has roughly quadrupled. The integration of advertisement is crucial. Right now, Snapchat is almost exclusively relying on paid filters, but hoping to expand soon. Snapchat is expecting roughly $60 million in revenue for 2015, but with estimates for $350 million in 2016 and between $1 and $2 billion by 2017. That is an expected annual growth rate of between 3 to 5 times. Its user base is growing significantly slower at around 1.5 times. What that indicates is that analysts expect the company to be able to monetize its users very quickly and effectively. Furthermore, through the addition of news in the “Discover” section.

For those of you that don’t know, Snapchat has also launched its first hardware product: “Spectacles”. It is effectively a pair of sunglasses with a camera where you can record 10 to 30 second videos. Those are then synced to your phone where you can upload them to Snapchat. You can currently only buy them at vending machines in select locations for $129.99.

Snapchat is now looking at an Initial Public Offering (IPO), and this coupled with the launch of its first physical product “Spectacles”, meant that the company has rebranded itself from Snapchat Inc. to Snap Inc. In the official statement by Spiegel: “You can search Snapchat or Spectacles for the fun stuff and leave Snap Inc. for the Wall Street crowd”. This is where the company currently stands; in between a start-up and the move to a noted tech company with a separate identity to both Wall Street and its customers. With this comes the addition of products/services and rebranding as a serious business to invest in. Google and Facebook went through this stage; Google with the acquisition of YouTube and Facebook with the launch of Messenger as a separate application. These changes marked the move away from one simple product being the entire company to a diversified corporation which an individual investor can buy into.

Snap Inc. is looking at a $25 billion IPO, making it one of the largest tech IPO’s in history. But where does this number come from and what does it even mean? There are several different quantitative methods most notably; discounted cash flows (valuing all the future cash flows (to an investor) at an decreasing rate so that future cash flows are worth less nowadays then more recent ones), multiples-based valuation (a similar company is taken and some values compared, such as revenue, and that multiple then applied to the valuation) and the First Chicago Method (a combination of both methods above, with different scenarios). Where does the Snap valuation fit in? To give a starting point, Snap was valued at $20 billion in May during a round of private funding. If we are looking at revenue multiples (the multiple of IPO value and revenue), then Snapchat seems rather grossly overvalued. All major tech companies launched at less than 20 times its expected revenue. Facebook launched at 19 times its revenue. Twitter at 13 times. Snap wants to launch at 25 times its expected revenue.

Revenue and valuations are not intrinsically related through some formula, and the figure considered acceptable varies depending on the sector being considered. However, given the comparative figure it shows how self-confident Snapchat is. In the end, the share pricing is what the success of an initial public offering depends on, because the more you can charge per share, the more money the company can rake in. What happens after the IPO with the shares is less relevant to the company. The money has been made. Supply and demand is the other side of the IPO. You might have some fancy valuation but it all depends on what people are willing to pay for your shares. If stocks are currently doing well, then you might get away with overpricing your shares. Similarly if stocks are trading at low prices, then a high valuation will be difficult to justify.

For the average Snapchat user the IPO will change nothing. However in the investment world, Snap will be the first large tech company in a while to go public. Companies like Uber and AirBnb will be eyeing the IPO closely. Both companies are looking at an IPO in the near future, and Snap going public could give a good indication of pricing for a well-known company which is in the peoples mouth. What we do know is that the market is currently starved of fresh companies going public, with less and less IPO’s since the burst of the dotcom bubble around 2000. We will have to wait and see how the Snap IPO goes, but it is certain that it will be closely scrutinized.

By Tim Knickmann

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