Why Snapchat is still overvalued

In 2014, we all know that you can build a very successful business on nothing but ads. Ad-supported businesses can be huge and very profitable — look at Google or Facebook or even websites like Buzzfeed. Very clearly, ads work and can work very well even as the sole revenue stream for a business. The problem though comes when you try to build a new startup without any clear monetization strategy, other than the idea that we’ll put in ads. Because the thing is, not every business is suited for ads; some business types and models are, by nature, better designed to leverage advertisements.

For example, Google and other search engines are able to deliver ads in an environment where you are already searching for that sort of thing — sponsored websites are congruous to that experience. Now Facebook is less so, but because of the amount of information it has and sheer amount of eyeballs, it’s able to make do, by delivering more and more relevant ads. Buzzfeed is perhaps the best example of integration, seamlessly rolling in sponsored posts and content in extraordinarily effective fashion and grand demonstration of the profitability of native advertising.

Snapchat though is a little like Facebook, except without all of the data about its users that Facebook has. And that’s why I though Snapchat is doomed to fail, if it tries to continue going it alone. Snapchat does have useful data, large numbers of eyeballs (100 MM MAUs), and a track record of success at developing and adding in new features. My doubt is whether or not (and likely not) Snapchat can ever leverage that data well enough to deliver effective advertising and charge enough for those ads to justify the kind of valuation they’re getting.

Don’t get me wrong, Snapchat is enormously valuable. What I question is if it’s really $10 Billion dollars valuable. I question if Snapchat can be worth that on the open market, outside of rounds of VC money, and if it really should be.

Snapchat is trying to do some interesting new things on the advertising front with Snapchat Discovery, rumored to be scheduled to launch in November. It remains to be seen how effective it turns out to be, both for potential advertisers, but also as a revenue stream for Snapchat. Based on comparable companies, Snapchat should be able to generate $4-$5 per active user on an annual basis, fairly easily if they placed traditional ads throughout their product. A nice chunk of change, only that’s still just half a billion dollars, making their valuation 20 x Revenue.

I still continue to believe that Snapchat’s future is in being sold to one of the bigger players on the market — Facebook or Google or Microsoft. Players who have the capability to leverage the data and eyeballs Snapchat already has and the financial power to eat long periods of losses. Still, based on the sale of Instagram or WhatsApp, consumer facing app-based products seem to command a price of a little more than $30 per MAU. Again, that puts Snapchat’s price on the market at only $3–4 Billion — the size of the offers they’ve already turned down.

Now of course Snapchat is doing something sort of novel, but it does remain to be seen if it becomes novelty or commonplace. I was wrong about my earlier prediction of Poke coming back as a standalone app, but Facebook did mount a challenger in the form of Slingshot, which had a cool reply-to-unlock feature (which they recently got made optional.) I haven’t used it yet myself, because it’s not available on Windows Phone, but it seemed like a neat alternative that just hasn’t taken off.

https://www.youtube.com/watch?v=Dt7Ndeot2Dk#action=share

So obviously Snapchat has showed staying power so far and demonstrated remarkable growth and adoption beyond its initial teenage sexting audience. I just remain doubtful that it can monetize well enough or continue to grow fast enough long term to justify its $10 Billion valuation. Let me know what you think.