Snap Inc. the parent company of Snapchat is expected to go public as soon as March of this Year, led by Morgan Stanley and Goldman Sachs. Snapchat filed for a $3 billion IPO valuing the company at a total of $25 billion. Major Equity Holders of Snapchat will be the two co-founders, Evan Spiegel (co-founding CEO) and Robert Murphy (co-founding CTO), with 22% each, giving them control over all stockholder decisions, as they control a substantial amount of the voting stocks. So like many of its Silicon Valley peers, Snap will have a dual class stock structure that consolidates control among a few key executives. Other big shareholders will be the Venture Capital companies that supported Snapchat from the early days, Benchmark Capital Partners (12,7%) and Lightspeed Venture Partners (8,3%). The app used by 158 million users on a daily basis has incurred a loss of nearly $500 million in 2016 preceeded by a loss of $373 million in 2015, with a total accumulated loss of $ 1.2 billion since 2011. The filing of the company that will be traded under the ticker SNAP comes at an exciting but challenging time. This will be one of the biggest tech IPOs in the recent past. In a recent interview with CNBC, Trip Chowdhry, the managing partner at Global Equities Research called Snap junk not worth more than $500 million. He said this about the company: “We are at the tail end of the social media boom. Novelty is giving way to fatigue.” To a large extent, I agree with him. The why will be illitarated in this article.
Most people would define Snapchat as a Social Media, nevertheless Chat Inc. has tried to define itself as a camera company. The markets with the biggest weights are the US with 68 million users and Europe with 52 million daily users. For Snapchat the target market is the millennials. In fact, on a daily basis, the company reaches 41% of people aged between 18 and 34. It seems unlikely it will have the staying power to ever monetize on its supposedly huge user base. Particularly because those (very young) users aren’t very easily monetized in any conventional sense. This will be one of the biggest challenges for Snapchat.
Source: Bloomberg
How will Snapchat distinguish itself from its closest peers? Facebook and many others of the current potential competitors have significantly higher resources and broader global recognition and occupy better competitive positions in certain markets than Snapchat. These factors may allow Snapchats competitors to respond to new or emerging technologies and changing market requirements better. Snapchat also relies on Google for a vast majority of their computing, storage, bandwidth and other services. Any disruption of or interference with their use of of the Google Cloud operation would negatively affect their operations and seriously harm business. Any transition from the cloud services currently provided by Google Cloud to another cloud provider would be difficult to implement and will cause Snapchat to incur significant time and expense. Snapchat has committed to spend $2 billion with Google Cloud over the next five years and has built software and computer systems to use computing, storage capabilities, bandwidth, and other services provided by Google, some of which do not have an alternative in the market. Facebook, Instagram’s owner, has for five years now been trying its best to destroy Snapchat. Every effort failed, until recently, when Instagram launched a near-exact clone of Snapchat Stories, called Instagram Stories.What Analysts had been reporting, that there has been a sharp decline in views of Snapchat Stories, has been confirmed in the latest filling by Chat. In long term Snapchat will face challenges of user growth especially when the current users age.
“We had 158 million Daily Active Users on average in the quarter ended December 31, 2016, and we view Daily Active Users as a critical measure of our user engagement. Adding, maintaining, and engaging Daily Active Users have been and will continue to be necessary. We anticipate that our Daily Active Users growth rate will decline over time if the size of our active user base increases or we achieve higher market penetration rates.”
It seems clear that if Snapchat is unable to venture into new business lines the company will suffer. To counter-act this threat Snapchat is diversifying its product portfolio with the integration of a new product, the Snapchat Spectacles. The Spectales business has failed to pick up any steam as off recently and seems to be a cash-out move.
“The launch of Spectacles, which has not generated significant revenue for us, is a good example. There is no guarantee that investing in new lines of business, new products, and other initiatives will succeed. If we do not successfully develop new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs, and our business could be seriously harmed.”
As a private company, Snap’s financials are not known. However, in a report by Recode, Snap told investors that it would generate between $300 and $350 million in revenues in 2016. eMarketer on the other hand projected that Snap would generate almost a billion dollars in 2017. The ad revenues would grow to $1.7 billion in 2018 as shown below.
Source: eMarketer
If the figures are true, at the IPO, Snapchat will be trading at 25x its projected revenues. This will be higher than its would-be peers multiple as shown below, making Snapchat not a cheap option. When Facebook went public in 2012, its shares were priced at more than 19 times its estimated revenue for the following 12 months, according to a Bloomberg Intelligence analysis.
Source: Bloomberg
I have no doubt that Snapchat is a great company doing a great job at targenting the millenials. The only problem with it is the valuation, considering all the operational risks and all the strategic disadvantages Snapchat has. The $25 billion price places the company at half of the size of Instagram which analysts have valued at 50$ billion. The statement that Investors who go long on the IPO will make a grave mistake is backed by a statement in the filing that should raise all red flags:
“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.“
Sir of Finance 