Summary
Goal to provide as accurate an estimate as my Twilio pre-IPO analysis.
Snap’s value derived from its young, addicted 158M user base (though user growth is rapidly slowing).
Early Snap advertiser results compelling; Snap should own a solid share of the $66B mobile ad market.
Snap’s $25B IPO valuation goal would represent a 20-25% premium to the value per daily user of its May ’16 financing.
I estimate filing range comes in near prior round valuation of $18B (est. $15-$16 per share), is revised up, then trades up to $20-$25 per share ($22B-$28B).
This article on Snap (Pending:SNAP) is intended to be in a similar vein to the analysis I did for Twilio (NYSE:TWLO) prior to its final IPO share price filings and subsequent trading.
For Twilio, I wrote a piece estimating its IPO share price (I estimated a filing range of $16-$18 with post-IPO pop to $24+; TWLO later filed with an initial IPO price range of $12-$14, ultimately offered IPO shares at $15, which then traded up to $28 to close first day). I later used the analysis to support a follow-up piece in August 2016 after Twilio had traded up to $50-$55 to illustrate how it was absurdly overvalued. I noted then that a $30 per share price was more in line with where the company’s performance supported; three months later, TWLO had traded down to $30 per share, where it hovers to this day.
For sport, I’ll again try my hand at accurately estimating IPO prices. This time for Snap.
Snap Background
Snap filed its S-1 filing for initial public offering on February 2, 2017, and a week later, on February 9, an amended S-1 filing, with the most notable update being admission that competition has impacted user growth and disclosure of a 5-year commitment to spend $1B with Amazon Web Services (NASDAQ:AMZN).
Snap began in 2010 as an iPhone app developed by a few 20-year olds at Stanford that allowed users to send pictures that disappear after a pre-set time set by the sender. Two years later, it had amassed 1M users. Another ~18 months saw the addition of features like “stories” (chronological pictures of a user’s day), “smartfilters” and replay (time stamp, temperature, and speed), and “chat” (text and video chat), helping Snap reach 50M users midway through 2014.
Impressive User Base, But Growth Slowing And Young Users Cost A Lot To Acquire And Addictive High Engagement Costs a Lot to Service
Today, Snap has 158M daily active users (DAU) who spend on average 25 to 30 minutes a day sending on average 16 snaps a day (2.5B snaps sent daily), with 25% of users posting daily to their stories. This engagement is ravenous for a mobile app, representing ~2x the time engagement of Instagram and 20x+ the time engagement of Twitter (NYSE:TWTR), and is more in line with video and desktop-centric sites like YouTube (40 minute avg. daily user engagement) and Facebook (NASDAQ:FB) (35 minute avg. daily user engagement). Snap introduced a physical product, Spectacles, which is too early to determine any meaningful augmentation to its mobile app business.
Snap’s user base has grown fast but is slowing, and the capital cost to amass Snap’s base is high relative to other platforms. At its IPO, Facebook had 526M daily active users, growing 9% quarter over quarter, which was built on a cumulative invested capital base at IPO of $3.5B, or $7 of invested capital per daily user. Twitter had over 100M daily active users, growing 7% quarter over quarter, which was built on a cumulative invested capital base at IPO of $1.1B or ~$10 of capital per daily user.
With its 158M daily user base, Snap falls well below Facebook’s scale at IPO, but is 1.5x Twitter’s size. However, Snap revealed a rapidly slowing quarterly growth of 4% in most recent Q4, and it took Snap $2.7B of cumulative invested capital to accumulate this base, or $17 of invested capital per daily user (2.6x the cost of Facebook’s base and 1.7x the cost of Twitter’s). Snap users have been more expensive to accumulate and also cost more to service: the average quarterly COGS per daily active user for Snap ($1 quarterly COGS/DAU) is 1.6x more expensive than Twitter’s ($0.60 quarterly COGS/DAU) and 1.8x more expensive than Facebook’s ($0.50 quarterly COGS/DAU). Another way to see this is that Snapchat only just logged its first quarter of material gross profit profitability in Q4 ’16 (granted it is very young in its ad monetization path).
Time will tell if Snap’s users ultimately prove compellingly profitable to cover high initial acquisition costs and higher ongoing service…