Snap – Valuation snaps pt. II.

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Twitter remains by far the better choice

• Reality is beginning to set in for Snap Inc. but I think that the shares still have some distance to go before there is an opportunity to snap up a bargain.
• A major downgrade by one of its underwriters taking the target price from $28 to just $16 caused the shares to dip to $15.44 which combined with the possibility that Snap Spectacles are not selling that well and savage competition does not bode well.
• A very informal survey found that the target group (millennials) were not that interested in Snap Spectacles, have not seen them in public and do not know anyone else who is interested in the product.
• However, there was some interest in Snap’s new functions such as Snap Maps and World Lenses but this is where the competition problem comes to the fore.
• The minute Snap hits on an innovation that resonates with its user base, Facebook will copy it and offer it to its 1.2bn Messenger users or 600m Instagram users which, in my opinion, pretty much neuters the appeal of Snap.
• This is because both of these companies are network based businesses where Facebook’s network is orders of magnitude larger and therefore offers its users exponentially more utility.
• Consequently, I really struggle to see how Snap is going to increase its user base as its differentiation is flagging and the same services on Facebook are more useful.
• It is on this basis that I value the company.
• The peer group of Facebook, Twitter and LINE Corp is trading on a forward EV/Sales multiple of 6.6x for 2017E and 5.5x for 2018E.
• Given, Snap Inc.’s current growth rate and its medium-term potential (see here), I think that the company could conceivably generate revenues of $800m in 2017E and $1.2bn in 2018E.
• Being generous to Snap Inc. and because it is growing faster than the peer group I can give it a 200% premium to its peers giving an EV valuation of $10.5bn based on 2017E and $13.2bn based on 2018E.
• The average of these two is $11.9bn with which I can be comfortable assuming flawless execution, continued rapid growth and a move into generating profits.
• This translates into $12.40 per share which is still some 20% below where the share price is today despite recent falls.
• Hence, I think that unless Snap Inc. can get its user base really growing again, it is going to have difficulty in justifying it’s still lofty valuation and I see further downside.
• If Snap were to go below $10 per share ($9.6bn), there could be significant acquisition interest.
• Until then, I would stay away.
• Twitter (see here) remains in a much better position than Snap Inc. and if I was forced to choose between the two, I would have Twitter any day of the week.