So How Much Is Snapchat Really Worth?
”I’m now 93 and I think it is the perfect time to join Snapchat.” Shimon Peres, August 2016.
Snapchat, the photography and messaging app that captured the attention of an entire generation by offering disappearing photos and visual effects, is heading towards an IPO at $25B, WSJ reported last week.
The fact that Snapchat is getting ready to sprint towards an IPO is not a big surprise. Evan Spiegel, CEO of Snapchat, has said he is willing to do so on multiple occasions. He also hired Imram Khan, a former investment banker who worked on Alibaba’s giant $140B IPO at 2014, as the Chief Strategy Officer.
The real eye opener, however, was the fact that Snapchat plans to raise money for an IPO at a valuation of $25B, making it the biggest IPO since Alibaba.
Is Snapchat really worth 25 billion dollars? According to Zirra, a research company focusing on the private tech market, Snapchat’s current valuation is estimated at $17B. The exit valuation (either M&A or IPO) is estimated to be as much as $26B.
Zirra’s algorithm for evaluating private tech companies is based on 80 parameters such as the team, product, momentum, media coverage, and is calibrated against the behavior of other companies at the same market. The algorithm also supports the common belief that the company is on the verge of an exit, with a window of opportunity of 1–2 years, and with an exit probability of 60%-70%, which is relatively high in terms of Zirra’s algorithm.
How to Build a Billion Dollar Company from Disappearing Stuff
It is not surprising, however, that Snapchat, a startup only five years old that is mainly used by your kids or your nieces and nephews, earned only $3.1 million at 2014, the first year it has decided to generate revenues and launched an advertising platform. It is also not surprising that the company lost $128 million, according to the late blog Gawker. Social networks invest their few first years in massive growth and developing popular features.
But if the rumors published in the media, claiming that Snapchat should conclude 2016 with around $350 million, are correct — that is something that should make your jaw drop.
Next year, Snapchat’s revenues should amount to $935 million, according to eMarketer or to to $1 billion, according to the Wall Street Journal. That sounds very optimistic, but also feasible, considering the revenues are growing 5–7 times year over year, and that the Snapchat ads platform is getting much more elaborate and diversified every quarter.
Snapchat proved it reaches a dedicated and engaged audience that might be considered valuable in terms of ad dollars, even though the demographics are very narrow.
According to a Vox/Morning Consult poll, 54% of people ages 30 to 44 say they never use Snapchat, compared with 26% of those under 30 and 82% of those ages 45 to 54. On the last quarter of 2015, 85% of Snapchat’s users were less than 35 and half of the most active users were 16–24.
But Snapchat’s audience is not only young and engaged, it is also growing rapidly. Last November, Snapchat said it had more than 100 million active users. Bloomberg reported this June that the number has grown to about 150 million. In just over six months the user base increased by 50%.
Twitter, for instance, has more than 310 million users, but has less than 140 million dedicated daily users according to Bloomberg. So, basically, Snapchat is more popular than Twitter, which is valued today at around $14B.
As much as the market was skeptical towards Facebook’s IPO, people are just as skeptical now regarding Snapchat. But Snapchat, which was the new kid in town, is not a kid anymore, and is also not that new. Well, it keeps eternal youth by preserving a very young audience, but the revenues streams and their diversity are impressive. With more than $300 million in revenue the company proves that advertisers are attracted to Snapchat for its broad reach among young millennials and those in Generation Z.
In only two years, Snapchat launched various channels of advertising and revenue streams:
- Snapchat Discover: Embedding native ad content to the home screen that contain text, animation, and video clips, usually from a news or content outlet. For instance: The Burberry Discover Channel — currently it is the largest share of the ad revenue with 43% in the U.S., according to eMarketer.
- Snapchat Stories: Short videos using funny or eye-catching filters that lasts for 24 hours. For instance: clips of NBA games. This accounted for 27.7% of total ad sales in 2016, is expected to bypass Discover in being the biggest revenue stream.
- Sponsored Lenses: AR-based technology, putting items such as masks on user’s face, visually morphing them into other characters like animals, pirates or cowboys. NFL sponsored screening a virtual helmet that a user can “wear” while talking about yesterday’s football match. This currently accounts for 21% of Snapchat’s revenue.
- Sponsored Geofilters: Text filters that can only be used at a specific location. For instance, McDonald’s allows users to embed french fries filters only in its restaurants. This currently accounts for 8.4% of the total revenues, although this feature only launched commercially this February.
- Snapchat Partners: Its advertising API, allowing third parties to sell ads on the platform and marketers to buy ads through automated processes and with more precise targeting. In doing so, Snapchat is lifting the barrier to bring in massive ad spending but it is trying to be very selective, at least in the beginning. For now, only ads between user stories are being handled by third-party ad tech firms. Ads on Live Stories and the Discover sections are still managed directly by Snapchat for now, The Information reports.
The Stock Market Awaits Snapchat
If Snapchat decides to move forward with their IPO plan with full steam it will not resemble other mega-IPOs, by any means. Assuming that their valuation will remain $25B, Snapchat will present the highest Enterprise-Value-To-Revenue Multiple among social networks IPOs. Facebook presented a multiple of 28 in its IPO and Twitter valued 52 times its revenue. Snapchat will show a multiple of 62.5, considering a yearly run rate of about $400m yearly.
However, Snapchat’s yearly ARPU is among the lowest. As a Facebook user was worth $4.40 in ad dollars on the eve of their IPO, Snapchat presents an ARPU of $2.5 ad dollars, estimating that within couple of months Snapchat will add a few more million of users.
But as with Twitter, Facebook, and LinkedIn, the market is waiting for a giant brand to go public. “After the successful IPOs of Nutanix, Twilio, and Coupa, it is clear that the public market for B2B software technology is ripe, but the market is still thirsty for a massive consumer product brand IPO,” says Oren Bar-On, a senior partner at EY.
“The market is searching for a well-known consumer brand to go to an IPO, and there are very few companies who can fulfill that. The interest rate is rather low, so there are a lot of reasons why this is good timing. The only question that should be asked is how much a company would like to raise during an IPO. The less it is, the better it is for the IPO.”
So the big billion-dollar question is not if Snapchat is worth $25B, but rather how much money does it need to raise in order to keep growing after the IPO. A $5 billion dollar round might have dire consequences in a $25B valuation. Instead, raising around $1 billion makes much more sense for Snapchat at this stage. And, if Snapchat needs much more than that it will have no choice but to lower its valuation.
World War (on Generation) Z
Although Snapchat significantly increased its user base and diversified its streams of revenue, it’s still lagging behind Facebook with its various brands such as Instagram and Messenger. Snapchat has 31.6% of social networking users in the U.S.
Snapchat’s unique features are also being copied by the competing Facebook umbrella of companies, with Instagram adding Stories and Direct Messaging, Facebook-owned WhatsApp adding creative tools such as overlaid text, and Facebook’s “Messenger Day” adding photos that disappear after 24 hours.
A comparison of Facebook’s apps gallery (including Instagram and Messenger) with Snapchat and Twitter on Google Trends shows similar trends: Twitter weakens dramatically, while Snapchat and WhatsApp gain momentum at the same time, the latter in the lead. But a glimpse at the app stores shows that Snapchat is in the lead, even over Messenger and Instagram.
Snapchat recently changed its name to Snap Inc and declared it is a “camera company,” even if you thought it was a messaging app. It recently launched a camera-on-glasses and is searching to develop new VR products.
But Facebook, along with Google, Apple, Magicleap, and even Microsoft are much more rooted in the “camera” business. Facebook already owns Oculus VR, is about to launch a VR app, and is in a continuous acquisitions spree for VR companies — such as Pebbles and Two Big Ears.
It is quite clear that Snapchat is still not a hardware company, although the camera-glasses was a nice gimmick. Snapchat will probably have to use much of its funding to acquire VR, AR, and hardware companies, and jump into to cold water of future platforms developed right now in much of the Silicon Valley.
Unrest in Venice
A few days after WSJ reported on Snapchat’s intention to go public, Business Insider published its own story about Snapchat. It was not about the company’s future business plans or the various advertising channels the company is about to gain millions through, as much as about the general unrest among some of the employees.
According to Business Insider, Snapchat suffers from a polarizing culture, leaving many employees frustrated. Set far away from Silicon Valley, scattered between dozens of former residential houses on Venice Beach, Los Angeles, the employees not only feel distant from the management team, but also alienated from them.
Evan Spiegel is depicted as a Steve Jobs-style manager, centralized with an “obsession to secrecy,” according to the piece. Several employees report a lack of communication and transparency inside Snapchat and about what’s in the pipeline, abrupt termination of development groups and layoffs, excessive control over what employees can say about their jobs and titles, and alienation from Spiegel himself, who is rarely seen in the company.
Might that be the reason Snapchat’s management decided to go forward with the IPO plans? Or maybe the general unrest brought someone to leak the IPO story? An IPO of $25B dollars can be a big deal for the employees. Snapchat is still a small company — with little more than 1,000 people, an IPO of this size could make many of them millionaires.