Benchmarking Snap’s S-1 IPO Filing

How does Snap’s S-1 filing compare to Facebook and Twitter?

Details surrounding one of the most highly anticipated IPOs in recent memory became known as Snap officially filed its S-1 . Snap Inc, the parent company of Snapchat, is looking to raise $3B in its IPO later this year at a $25B valuation.

I’ve written about Snap’s valuation before here and talked about Snapchat a few times on TV here and again here. However, I’m by no means an expert on Snap, nor do I have insider information on the company (Snap is actually one of the most secretive companies around). I’m an avid user of Snapchat and I even own a pair of Spectacles 😎. Out of genuine interest, I follow the company pretty closely.
I decided to see how Snapchat stacks up Facebook and Twitter prior to their respective IPOs

Note: In this post, I’m just presenting the facts and observations — all quantitative. There are many opinions on whether Snap will be successful as a public company; that is not the objective of this post (I may get into that in a future post).

If you’re considering buying Snap stock when it goes public, you might want to read this.


The Basics

First, let’s compare some basic metrics and see how the 3 stack up.

Snap is fastest of the 3 to go public from founding to IPO at 6 years!
Twitter had approximately the same amount of employees at the time it went public.
Snap has raised the most prior to going public, looking to raise an additional $3B in its IPO.
Note: the % represents the ratio of capital raised at IPO / IPO Valuation. This is NOT the dilution % since an IPO always involves secondary and not all money raised in the IPO goes directly into the business.

Key Takeaways

  • Snap is quickest of the 3 to go from founding to IPO
  • Snap has raised the most of the 3 in private markets
  • Snap’s rumoured IPO valuation of $25B (we won’t know for certain until the IPO shares are priced, which happens on the evening before the IPO), is higher than Twitter’s IPO but significantly smaller than Facebook

Show me the money

Looking at the financial metrics it’s easy to see how much of a different beast Facebook was as a company even before it’s IPO. The year leading up to the IPO, Facebook made $1B in profit alone (Fun fact: while both Twitter and Snap filed their S-1 financial figures in thousands, Facebook had filed theirs in millions!)

With that in mind, let’s dive in…

Revenue

Facebook was generating almost $2B in annual revenues, 2 years prior to its IPO. Snap only turned on its “revenue switch” recently, but has a long way to go to reach $1B annual revenues — a milestone they’re rumoured to hit in 2017.

Looking at quarterly revenues leading up to IPO, Facebook was in a whole different stratosphere.

Let’s compare Twitter and Snap

Snap’s revenue is growing faster than Twitter’s revenue did leading up to IPO

Gross Margins

Revenues are great, but how much does it cost you to generate $1 of revenue?

Snap has negative Gross Margins! (WHAT?!)

Snap has negative gross margins — what does that mean? Think of it this way, to generate $100 of revenue Snap has to spend $112 not even considering its fixed costs (keeping the lights on in the office, etc). Another analogy to use here — If a company created widgets and sold them for $100, but it cost them $112 to make that widget. This means for every widget they sell, they incur a loss of $12, so the more they sell — the more they lose! (WHAT A TERRIBLE BUSINESS!)

Research and Development expenses as a % of Revenue

As tech companies that are always developing new and innovative features, its important to look at their spending behaviour in this category.

What if we look at it on a total dollar basis?

Twitter and Snap spent similar amounts on R&D leading up to their respective IPOs.

Sales & Marketing expenses as a % of Revenue

And on a total dollar basis?

Again, we note Twitter and Snap have similar spending habits.

General & Administrative expense as a % of Revenue

Total dollar basis

Snap spent $149M in G&A 2 years prior to its IPO (2015) or 253% of its revenue! They’ve curbed some of that spending having spent only 41% of their revenue on G&A last year (2016).

Net Profit (Loss) Margin

Doesn’t take a rocket scientist to tell that Snap is no where close being profitable.

Interesting note here is that not only was Facebook profitable 2 years prior to their IPO, they had a 27% net profit margin the year prior to their IPO!

One alarming statement found in Snap’s S-1 that investors will sure hope is not the case is:

We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.

Cash is king

Twitter didn’t report their cash balance 2 years prior to IPO

Snap has a healthy cash balance with almost 1 billion in the bank!

What about growth and engagement metrics?

Above all else, growth drives valuations.

For social media companies like Snap, Twitter and Facebook — who generate most of their revenues from selling ads on their respective platforms, engagement and usage are key! If users are not coming back to the platform on a regular cadence it’s hard to convince advertisers to promote their brands and companies on your platform.

DAU

Daily active users (DAU) represents the number of users that are accessing the platform on a daily basis. Unfortunately Twitter does not report DAU so for the purposes of this analysis, I’ve included Twitter’s MAU (monthly active users) which are always higher than DAU.

All 3 platforms had similar quarterly user growth metrics leading up to their IPOs. However, as Snap has a much smaller DAU (relative to Facebook), one would expect it to grow faster — this is not the case.

ARPU

Average revenue per user (ARPU) determines how effectively a social media platform is monetizing its total user base. In order for a social network to thrive, once it has amassed a large user base it must begin to find ways to generate revenues from that user base. Snap, Twitter and Facebook are all free to use for the end user — the ARPU calculates (on average) how much advertising revenue each user generates and thus the value each user brings to the platform.

Facebook was generating 2.3x more per user than Snap is leading up to its IPO. Note Twitter didn’t report DAU and thus its MAU figures were used which compresses its ARPU.

Valuation multiple

Snap is expected to be valued at $25B when it IPO. A common multiple investors use to compare companies is Enterprise Value to LTM (last twelve months) Revenues.

Here’s how Snap compares to Facebook and Twitter at the time of their IPOs:

Snap is set to debut at 61.8x its LTM revenues almost 3x more than Facebook at its debut. For what it’s worth, Facebook currently trades at 13.7x, while Twitter trades at 5.7x — both considerably lower than Snap’s expected debut at 61.8x!

Some final thoughts

Facebook and Twitter (LinkedIn to a certain extent as well, although their revenue model is very different from Facebook, Twitter and Snap) have paved the way for publicly traded social media companies. However they’re each on divergent paths.

Facebook debuted at $38/share, falling as low as $18/share, to recently reaching an all-time high of $135/share. They’ve gone from generating 100% of their revenue from desktop web ads at the time of IPO to now generating 84% of their revenue from mobile — a significant accomplishment. They’ve been profitable before their IPO.

Twitter on the other hand, debuted at $26/share, climbing as high as $69/share to now trading well below its IPO price at $17/share. Twitter has struggled to continue to grow it’s user base, keep users engaged on the platform and as a result have struggled as a public company. (And they’re still not profitable!)

As Snap sets to go public, investors will hope it behaves more like Facebook than Twitter. However, the S-1 filing of Snap has eerie similarities with that of Twitter.

Only time will tell which way Snap will trade in the public markets. Will it thrive like Facebook has or falter as a public company like Twitter?

If you want to get high quality images of these charts, or just chat about Snap’s S-1 filing, tech, (or anything really), DM me on Twitter: @ shubham or Snapchat me 👻: @ shubhamdatta

Shubham Datta is passionate about technology, startups, sports, and investing. He is an Associate at SurePath Capital Partners, where he helps fund, grow and exit startups. He has a B.Math from the University of Waterloo and is a CPA by training. You can find out more at www.shubhamdatta.com.

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