Snap’s Terrible IPO Timing

Digesting Snap’s S-1 filing and what it means

Jan Dawson
Feb 3, 2017 · 11 min read
Snap Slide Deck from the Jackdaw Research Quarterly Decks Service

Massive revenue growth

The first thing to note is that Snap is growing extremely fast from a revenue perspective. It showed its first ad in late 2014, and had its first meaningful revenue in 2015 (totaling $59 million), and then passed $400 million in revenue in 2016. The quarterly revenue picture is shown in the chart below.

Snap’s Quarterly Revenues

ARPU growth a major enabler

The major driver of this ramp in revenues is rapid growth in average revenue per user (ARPU), as shown in the next chart:

Snap Quarterly ARPU

Still a very US-centric financial picture

The reality is that Snap’s business is still very US-centric when it comes to generating revenue. North America had 43% of its users, but generated 88% of its revenues in Q4 2016 (over 98% of that coming from the US). That could be seen as an opportunity for Snap to broaden its horizons and put more effort into monetizing Snapchat in other regions, driving up ARPU, but this may also be a sign that Snap simply hasn’t gained the same traction in other regions yet. It increased its sales and marketing headcount by 340% in 2016, so there’s a good chance it’s hiring in these other markets to drive higher ad sales there.

Profits are another story entirely

While Snap’s revenue picture is fairly clear, the bottom line is a lot less healthy — Snap is losing money by the truckload. This may be one of the first companies I’ve seen file for an IPO whose cost of revenue alone outweighs its revenue in the most recent financial year.

Most margins are literally off the charts

It literally makes no sense to include here one of my customary charts showing various margins over time, because both of the biggest ones — operating and net margins — have been at -100% or multiples of it throughout Snap’s reported history (the only time I’ve seen anything like it is when looking at Alphabet’s Other Bets segment). Gross margin is the only one which is anywhere near positive, and was positive in the second half of 2016:

Snap Gross Margin
Snap Cost Components as a multiple of revenues, long term and short term views

User growth is a mixed bag

Snapchat reports only daily active users, and not monthly active users. That’s actually very sensible, and I always take it as a knock on Twitter that it refuses to give DAU figures — for an app that’s supposed to be a regular daily habit, monthly user numbers are a bit meaningless.

Linear annual growth

Daily active users have grown strongly over Snapchat’s history, as shown in the chart below, which shows the longer-term end of year picture, including some estimates based on milestones Snap provides in the S-1.

Snap DAUs, Annual year end view
Facebook and Snapchat user growth from 1 million

A much less straight line for quarterly growth

Things get a loss less linear when you look at quarterly growth numbers, as shown below.

Snap DAUs by quarter (quarterly average)
  • Third party data suggests that Snapchat began to slow down after Instagram launched its Stories feature, a clone of Snapchat’s own, which drove faster growth at Instagram and sucked usage and growth from Snapchat.

Differences by region

Where things get interesting is when you look at the regional breakdown of DAUs which Snap provides in the S-1 — the first of the charts below shows actual DAUs, while the second shows sequential growth in DAUs, both by region.

Snap DAUs and sequential DAU growth by region

Terrible timing for the IPO

We won’t really know whether Snap’s explanation or the external explanation (or some combination of the two) is correct until we see another quarter or two of data from Snap on its user base. If it returns to strong growth in Q1 and Q2 of this year, investors can breathe a sigh of relief, but if it doesn’t, then the worries will continue, If I were a potential investor, I’d be very wary of making big commitments to Snap in a March IPO, before any of those figures are known.

Beyond Devices

A blog about consumer technology from Jan Dawson and Jackdaw Research. Original home at www.beyonddevic.es. Jan Dawson is an analyst and consultant who helps consumer technology companies understand market trends and devise strategies for success.

Jan Dawson

Written by

Director, Research & Insights, Vivint Smart Home. Previously, Founder and Chief Analyst at Jackdaw Research.

Beyond Devices

A blog about consumer technology from Jan Dawson and Jackdaw Research. Original home at www.beyonddevic.es. Jan Dawson is an analyst and consultant who helps consumer technology companies understand market trends and devise strategies for success.