Will Snapchat’s $20B valuation disappear?
Unlike Snapchat’s messages, its $20B valuation is here to stay
The road to raising $1.8B at $20B valuation
The latest round of funding (Series F, for those counting) reportedly values Snapchat at about $20 billion. How reasonable is that given the company’s current revenue stream and expected growth in the future?
Snapchat has been raising their recent $1.8B round for the last little while. In March 2016, they raised $175M at a flat valuation from Fidelity (the investment firm, known to slash startup valuations). They also acquired a Toronto-based startup, Bitstrips (known for their Bitmoji app) for a rumoured $100M+. Bitmoji allows users to create their own personal emojis.
- March 2015: Snapchat raised $200M in a Series E round, valuing the company at approximately $16B valuation.
- November 2015: Its valuation was slashed by Fidelity to the tune of $22.91/share from $30.72 in June 2015, or 25%.
According to leaked financial information, Snapchat generated $59M in revenues for 2015, which would values Snapchat at over 300x revenues. For context Facebook is currently trading at 19x revenues (in a future post, I will compare and contrast Snapchat and Facebook). What’s more interesting is Snapchat expects revenue of $250M — $300M in 2016, or 4x as much as the prior year.
Valuing Snapchat
Can we value Snapchat using traditional methods or what is the proper way to value Snapchat?
Valuation is an art, more than it is a science, especially for early stage companies (yes, Snapchat has been around since Sept 2011), but its only started generating revenues in 2015. It’s still early days. All this to say, the valuation is really what the market is willing to pay for it.
Investors are really attracted to Snapchat — most of Snapchat’s recent investors agreed to receive common shares, instead of preferred stock. Typically investors like to receive preferred stock as it gives them special voting rights and preference to get paid on a liquidation event prior to common shareholders.
It’s hard to value Snapchat using traditional valuation methods, because it isn’t a traditional company. It’s a new concept, and its now developing into a new platform for advertisers — lots of experimentation going on, on the platform.
Investors are paying up for the growth potential they see in Snapchat, (i.e the 4x revenue growth).
With social/consumer apps, users and engagement matters A LOT
Users
Last year, Snapchat’s user base grew more than 50% to 100M Daily Active Users (DAU). For context, Twitter has 310M Monthly Active Users (MAU) as of Q1 2016, up 2.5% since Q1 2015.
During that time, here’s what has happened to Twitter’s stock price and as a result its valuation (down almost 70%) .
Even though, Twitter generated $595M in revenue in Q1 2016, up 36% YoY, stock is getting hammered because user growth has been stagnant and flat.
Engagement
Engagement is very important for social/communication apps. The last numbers disclosed by Snapchat state that 65% Snapchat users are creating content on a daily basis — that’s 71.5M of its 110M daily active users (as of December 2015)! Oh, and Snapchat users are watching 10 BILLION videos a day — yes I know that’s a big number!
Last year, the CEO of Vodafone in the UK, said that 75% of mobile upload traffic are people uploading things to Snapchat. If that wasn’t mind blowing enough, an average users are spending 30 minutes daily on the app (or 55 million hours! for all Snapchat users combined).
So you’ve got a growing user base that’s highly engaged, how do you monetize that?
In 2013, I wrote a post about how I thought Snapchat could monetize. Snapchat is a lot smarter than I am and none of those ideas are how it is monetizing.
Snapchat’s business can be broken down 3 main categories:
- Create videos/photos using the Camera — every time you open the app, its all about content creation, it opens up to the camera, inviting you to share through pictures or video what’s around you. Snapchat has already monetized this product, by allowing users/brands or anyone to create customized geofilters.
- Consume content through live stories and discover. When you’re viewing content on snapchat, you’re immersed in that content — it consumes the entire screen (this is so unique to Snapchat).
- Communicate through direct messaging or video/audio calling. I don’t think Snapchat will ever try to monetize this aspect of their product, or if they do, it’ll be after they’ve maximized the potential of content creation and consumption.
Content consumption has the biggest revenue potential for Snapchat. Evan Spiegal, CEO of Snapchat states that, “vertical videos are completed 9x more than horizontal videos”. Snapchat’s camera product lends itself naturally to the creation of vertical videos. Vertical videos feel natural, because it’s how you normally hold your phone.
This is a really compelling ad product. On YouTube, users can’t wait to click the little x to skip the ad that comes up prior to the video you actually want to watch — its annoying!
On Facebook or Twitter — both feed heavy platforms, you have multiple posts that you see on the screen, including pictures, text, video, sponsored posts (ads!),— it’s very easy to just skip over it.
On Snapchat, there’s a subtle difference (but a big one): INTENT.
You only view content that you want to see. If I want to see what is going on with a particular topic (Live Story) or brand (Discover) that’s on Snapchat, I click into that.
Several months ago, I was viewing a live story about Spring Break. It showed a bunch of kids on spring break at the beach, diving into swimming pools, music playing, partying, etc (just like you would see in the movies — but these were real people!). I wasn’t seeing this because I had browsed some websites about spring break or anything, I made clear intent to view this spring break story.
While viewing this story, I was served an ad for Hollister — the clothing company that associates its brand with California, beaches, surfing, etc. It felt like such a native experience, I watched the whole thing (it was only 10 seconds), and only when it was over did I even realize it was an ad (ads on snapchat have an “AD” watermark on the bottom right corner).
For Hollister (the advertiser) that’s a much better ROI then serving me a Facebook sponsored post or tweet on Twitter, that I can quickly glance over and skip — not even interacting with it.
As more brands and media companies continue to experiment and fine tune their advertising strategy on the platform, Snapchat will start to monetize its highly engaged user base. It’s still early days for Snapchat, they’ve got a tonne of engaged users using the product everyday and investors are excited about the monetization potential of these engaged users on the platform.
Snapchat’s $20B valuation is here to stay!
If you have any questions about any of the above, or you just want to Snapchat me, just scan my Snapcode 👇 or click here!
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.about.me/ShubhamDatta.
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