Contact: Scott Denne
Snap, the company behind the social networking app Snapchat, has taken the next step toward one of the most highly anticipated IPOs by disclosing its prospectus. The documents show astonishing revenue growth and a strong hold on a coveted demographic that will have some investors believing it could become the next major online media company. No less astonishing are Snap’s valuation expectations. Based on the price of its last private funding, the company carries a valuation of about $25bn, roughly 62 times trailing revenue. For comparison, Facebook trades at 12x, Alphabet (Google) at 5x and Twitter at 4x.
There’s no doubt that Snap has built an incredible media business. It has 158 million daily users, 68 million of them in North America. A majority of those users are 18-34 years old, a widely sought after demographic by advertisers and one that’s increasingly difficult to reach through television ads. That’s a big part of the reason why Snap’s revenue has grown sharply – it only began to post sales in 2015.
Snap generated about $2 per user in North America last quarter. Facebook generates about $24, so it’s not unprecedented for Snap to grow this number by 10x. And it will have to do so, as there’s not much space left for Snap within that demographic. There are about 110 million people in North America that fall into that age group and Snap’s daily users in North America grew by less than 5% last quarter. (Sales from international audiences at both social networks are a fraction of those from North America.)
To keep users and advertisers engaged, the company points to its history of generating new products and features. While it’s been successful in doing that to this point, it’s challenging to keep that momentum going on a platform that’s designed to entertain. The Snap team seems to have an eye for design and entertainment, but the offering documents cast doubt on its judgement in other parts of the business.
Nearly all of the company’s infrastructure runs on Google’s cloud and Snap signed a deal last month that commits it to spending $400m per year for the next five years on Google infrastructure. Snap’s ambition is to carve out a large share of the digital advertising market, and it’s hard to justify running its critical infrastructure with its largest rival.
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