Snap IPO: Biggest Tech IPO Since Facebook

The excitement continues to build for the Snap IPO, when the parent of the seemingly ubiquitous app Snapchat goes public.
The Snap IPO will be the largest technology IPO since Facebook (NASDAQ: FB), with a valuation in the $20 billion to $25 billion range.
Speaking of Facebook, it came up a lot during Snap’s recent road show. The company emphasized that, in terms of quality, it is the next Facebook . . . . and not the next Twitter (NASDAQ: TWTR).
The comparisons to these two social media companies are natural since Snap is best known for its social messaging app and will come on to the market with a hefty valuation.
So the question for investors who are contemplating snapping up the Snap IPO is this: What sort of a company am I buying?
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Snap IPO: Key Comparisons

Of course, Snap investors will hope that its IPO performs like Facebook and not Twitter.
Facebook stock is up 243% since its IPO on May 18, 2012. Meanwhile, since Twitter’s IPO on Nov. 7, 2013, its stock has fallen 61%.
A look at some of the latest quarterly metrics – courtesy of MarketWatch – shows that Snap is no Facebook . . . at least not yet. Consider some raw numbers**:

Daily Active Users:

  • Facebook – 1.23 billion
  • Twitter – 136 million
  • Snapchat – 158 million

Net Income:

  • Facebook – $4.57 billion
  • Twitter – $103 million (loss)
  • Snapchat – $169.9 million (loss)

Revenue:

  • Facebook – $8.8 billion
  • Twitter – $616 million
  • Snapchat – $165.7 million

(**Facebook and Twitter figures reflect fourth quarter of 2016 ending Dec. 31, 2016. Twitter figures reflect its 2016 third quarter.)

Obviously, the comparisons are unfair since Snap is a company at a much earlier stage in its existence. But the raw numbers do go to show the young company has quite an uphill climb to get close to Facebook.

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Snapchat’s Potential

Investors will be buying Snap’s potential for luring advertisers and generating ad revenues.
The big plus for the company is the demographics of its users. The largest number of Snapchat users falls into the 18 to 24 age range. This is a group advertisers are eager to connect with on mobile devices, since they watch little traditional television.
A look at the numbers again shows there are about 158 million users that open the app an average of 18 times a day. Some 60% of these users send a snap to a friend daily and 25% create a “story.”
The good news is that Snap pushed hard in the latest quarter to sell its video ads and sponsored filters. That resulted in a nearly sevenfold year-on-year increase in revenue to $405 million. However, its average revenue per use was only $2.15. That pales in comparison to Facebook’s $19.81.
But the potential is there, and the hypergrowth revenue rise demonstrates that.
However, a potential similarity to Twitter is also evident. Snapchat’s user growth in the latest quarter slowed to a pedestrian 3% rate.
Even in daily active users, the growth rate was only 5%. Back in 2009, when Facebook was about Snap’s size, its quarterly user growth rate was roughly 30%.
Losses widened too as total costs more than doubled in 2016. Snap’s net loss was $515 million versus a $373 million net loss the year before.
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Competitors and Features

Competition is rising, as acknowledged in the Snap IPO filing, the S-1. It comes from Facebook in the form of Instagram.
Since its launch last summer, Instagram Stories has already grown to 150 million daily active users. That puts it almost on par with Snapchat. Even some surveys show that Snapchat and Instagram are equally popular among U.S. teens.
And don’t forget that Snap users are mainly in the developed markets. Facebook has already made a major push into some developing markets. It may be tough for Snap to crack those high-growth markets with Facebook already established there.
One element in Snapchat’s favor is that there is no social feedback on the “stories.”  You don’t feel like you have to like or share something. Just enjoy.
The ads that it runs too are brief and can be instantly skipped. This leads to little backlash from users.
Advertisers can also customize Snapchat’s augmented reality selfie “lenses.” These efforts seem to have been successful so far. That could lead to Snap garnering more of the $71 billion a year that goes toward television advertising.

Snap IPO Valuation

Bottom line, there are a lot of “ifs” surrounding the Snap IPO.
For example, I’m still wondering why it insists on calling itself a camera company. Why would you want to get into hardware (think GoPro) in a big way when it’s even more cutthroat than social media?
And then there’s the lofty valuation.
Facebook is valued at 14 times sales. Twitter at a mere four times sales. But the impending Snap IPO is valued at a whopping 60 times sales!
That seems rich with the growth rate in daily active users slowing. But there is always hope.
In the run-up to its IPO, Facebook’s active user growth had slowed to 6%. But it has tripled since then. Buyers of the Snap IPO will be hoping for a repeat.
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