The SNAP IPO

To SNAP or not to SNAP

By Lawrence A. Sautter, 1st March 2017

 

SNAP IPO the next Twitter or will it be a dominant platform?

 

As a general rule, buying into IPOs is a bad idea, as the empirical evidence and statistics show from Jay R. Ritter. From 1980-2016 his data crunching shows that from over 3000 Tech IPOs only 50% have been profitable. During the Technology Bubble in 1999-2000 the Median Price to Sales ratios for 630 Tech IPOs were peaking at 49x and 14% were profitable. Since 2008 the Median Price to Sales ratio hasn’t been around 7x and fell to 5x in 2016. For the last four years less than 30% have turned out to be profitable.

 

With an estimated market capitalization of US$21 bn SNAP would have an IPO Price to Sales ratio of about 52x which looks very expensive. SNAP would have to reach up to nearly $4 bn in revenues by 2021 or a compounded annual growth of more than 58% p.a. to reach a P/S ratio like Facebook did 5 years after the IPO. That is a huge challenge.

 

Pre-IPO Price to Sales Valuation comparison:

 

 

post IPO

 

 

 

last

Q4 2016

 

CAGR 5y

5y post IPO

 

 

CAGR 5y

YoY rev

 

rev.growth

P/S

IPO P/S

P/S (ttm)

rev. Growth

rev. Growth

Facebook

47

11x

25x

14.2x

33.4

50.8

Google

57

5x

10x

6.4x

17

22.2

Twitter

no hist.

no hist.

12.4x

4.5x

 

0.9

SNAP

 

 

est. 52x

 

 

 

Median Internet Company*

 

6.5x

2.86x

Source: sautterinvest.ch

* Source: Jay R. Ritter, Warrington College of Business

 

1st March 2017

 

 

 

Estimated Revenue growth and possible market cap growth at rate of 15% p.a.

SNAP says DAU growth is likely to be “lumpy and unpredictable”, fluctuating with new product updates and investments, and user behavior. 

 

 

Will Snapchat have a Twitter problem?     

 

 

SNAP DAU comparison with Twitter MAU data which is fading fast:

 

Snap’s valuation is far too high to get excited at the moment. However, its advertising business has only just began. Snap has incurred operating losses in the past and may never achieve or maintain profitability, that’s the down side risk.

 

As a general rule, buying into IPOs is very tricky and you have to pay sufficient attention to profitability in valuing IPOs.

 

What does IPO stand for? “It’s probably overpriced”, right you are. This is a good approach to start with.

 

Make sure you understand the story and the business behind it.

 

The Snap Hype, a lot of noise about nothing?

 

Well, it is not just about messaging. The company moved into hardware late last year with Spectacles, sunglasses with a built-in camera that can take and share short video clips. So is Snap now a camera company with just another product?

 

Nathan Furr from INSEAD says: “If Snap intends to build products as a bridge to new platforms, or as an effort to creat a hybrid business model more robust than its current platform business model, that may make sense. So, how should you judge the viability of Snap’s strategy? If you believe the company is (1) mistakenly placing its focus on easily imitated products, rather than platforms, (2) losing sight on its core interaction, and (3) building on hardware platforms that will one day be commoditized, then you might be worried about Snap. On the other hand, if you think Snap’s “product” language is code for defensible, value-added additions to the core platform interaction, which you believe it can deliver, and that it is building bridges to future platforms with its camera strategy, then you have cause to be optimistic about its long-term viability.”

 

However, investors will watch user growth very closely and should it start to fade faster than expected, it could hit Snap’s share price very quickly and very hard.

 

Does Snap have to reach a much broader audience? Probably yes. We will see. It is already challenging Instagram from Facebook regarding users under 30 and is head-on-head with Instagram concerning total time spent on social apps under 30.

 

Finally, it’s good to know, that, according to the Council of Institutional Investors, companies with a controlling shareholder tend to underperform those that don’t.

 

 

Snap is structured in such a way that new shareholders won’t have voting rights and the input on matters usually associated with such rights, including board composition and executive pay. In the case of Snap, self-interest seems paramount.

 

So I wish the punters good luck with SNAP and don’t get burned.

 

 

Conclusion: It’s all about the long-term viability of the company’s strategy and the potential of building new platforms not products that can be commoditized like Facebook rolling out its most successful Snapchat copycat feature with Instagram Stories.

 

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