Snap Inc. – Valuation snaps.

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Snapchat looks more like Twitter than Facebook. 

• Snapchat appears to be intending to focus on engagement metrics to justify its $20bn-$25bn valuation in the coming IPO.
• I see this as a sure sign that real metrics such as revenue and profit will fall far short of that which a regular company would need to justify that valuation.
• Snapchat is essentially an instant messaging platform with the ability to send video and pictures as well as some cool and fun video annotation features.
• Although video is a big part of the appeal of Snapchat, I do not consider this to be a Media Consumption platform meaning that Snap Inc.’s coverage of the Digital Life pie is actually pretty low.
• Given its current offering, I would be prepared to give it Instant Messaging and Telephony giving it total coverage of 14%.
• I do not think that its offering is yet broad enough to allow it to monetise either Social Networking or Media Consumption.
• RFM estimates that this would give it the ability to grow revenues to around $2.5bn per year in the best instance at which point it would then grow around 7-8%.
• I suspect that the long-term promises being made will be far higher than this as I see no way in which this scenario could underpin a valuation of $20bn – $25bn.
• Furthermore, I remain concerned that Snapchat’s core user base of 12-24 year olds is not as interesting to advertisers as the older demographic groups.
• This is because this age group does not have a lot of money to spend on products and therefore is of less value to advertise to.
• The net result is that Snap Inc. looks more like Twitter than Facebook and also has a user base less capable of generating revenues.
• This means that Snap Inc. will need to innovate and develop its strategy beyond its core offering to have any chance of justifying the IPO valuation.
• Snap Spectacles are an interesting move in this direction and are unique as the only product that has made wearing technology on one’s face cool.
• However, they are not going to do anything to revenues and so will not directly alleviate the situation in which Snap Inc. will find itself.
• The net result is that I see the following scenario without a major innovation on the part of Snap Inc:
  • First: An IPO at $20bn-$25bn which goes reasonably on the back of promises that don’t have to be met for a little while.
  • Second: A big miss on a set of quarterly results as revenues don’t come though as promised causing a collapse in the valuation.
  • Third: Recovery will only come with a major innovation from Snap Inc. or the company will be acquired by one of the much larger ecosystems.
• On the basis of what I can see at the moment, I think a rosy future is already being paid for at $20bn – $25bn and so I would stay away from this one.