Snapchat, Undervalued Compared To Facebook And Twitter


Background

Snapchat is an image messaging and multimedia mobile application created by former Stanford students Evan Spiegel and Bobby Murphy. Beginning as “Picaboo,” the idea was to create a selfie app (application) which allowed users to share images that were explicitly short-lived and self-deleting. The temporary nature of the pictures would, therefore, encourage frivolity and emphasize a more natural flow of interaction.

SNAP Inc. (SNAP) went public on March 2, 2017, as the biggest tech IPO of the year. Valued at ~$25 billion, the stock initially took off rising from the IPO price of $17 to highs of $29 a few days afterwards but quickly crashed back down to its current price of $12.8/share on concerns regarding earnings and Daily Active User Growth. While growth companies are notoriously hard to value due to the unforeseen nature of predicting future trends, this article will try to analyze SNAP from an objective viewpoint by comparing to competitors Facebook ( NASDAQ:FB) and Twitter (NYSE:TWTR). Balance sheet metrics, user growth and revenue per user will be used to determine valuation and whether SNAP is worth an investment today.


Comparison to Peers

The following chart displays relevant metrics for the three companies SNAP, FB and TWTR.

Q2 2017

SNAP

FB

TWTR

Daily active users

173 million

1,325 million

~164 million (undisclosed 50%)

Daily active user Growth Y/Y

21%

17%

12% (undisclosed official numbers)

Daily active user Growth Q/Q


4.4%

3.1%

undisclosed

Enterprise Value (Net Debt + Market Cap)

14.422 B (8/14/2017)

495 B (8/14/2017)

12.2B (8/14/2017)

Avg User Time Spent Per Day

40 Min (under 25)

20 Min (over 25)

20 min (just FB)

40 min (FB+insta)

1 Min 10 min(undisclosed,

Second source)

DAUs North America


75 million

183 million

~34 million (estimated based on 50% DAU/MAU)

DAUs Rest of the World

97 million

1143 million

130 million (estimate)

Revenue per NA user

$1.97

$19.38

$9.79

Revenue Per Global User

$0.34 (Avg EU & Rest of World)

$2.87

$1.85

Based on the data above, Snapchat can be seen as a tech company with characteristics similar to both Facebook and Twitter. Snapchat has the user engage ment similar to Facebook but total user count similar to Twitter. While all 3 companies do have their difference, Snapchat stands out for having both a low market cap and high % of users within the lucrative North American Market. As can be seen in the graphics below, both Facebook and Twitter reported 3-8x more revenue from North American users compared to non-North American users.


Source: Facebook Q2 Investor Presentation


Source: Twitter Q2 Investor Presentation

Since SNAP just began the process of platform monetization, it is not fair to value the company based on traditional metrics such as P/E ratio, EBITDA or revenue. Instead, it is more important to extrapolate future earnings potential based on peers such as Facebook and Twitter. This is an important point since Facebook and Twitter are both established brands with stable earnings and revenues. Based on comparable company monetization analysis, we can determine whether or not SNAP has any value at current prices.


While future earnings are difficult to predict, this analysis will focus on three scenarios: (conservative RPU (Revenue Per user) same as Twitter, base RPU avg between FB and Twitter, aggressive RPU same as FB). All three scenarios regarding monetization at current DAU counts can be seen in the tables below:

Scenarios 1 – conservative:

This Scenario assumes that SNAP matches Twitters North American and International Revenue Per User rates of $9.79/user and $1.85/user respectively.


SNAP

FB

TWTR

Revenue Per User North America

$9.79

$19.38

$9.79

Revenue Per User Rest of the World

$1.85

$2.87(Averaged)

$1.85

North American Users

75 million

183 million

34 million

Non North American Users

97 million

1143 million


130 million

Net Costs Q 2 2017

630 million

4,920 million

612 million

Revenue

913 million

9321 million

573 million

EBITDA (loss)

283 million

million

(39 million)

P/EBITDA ratio(current Market Cap)

13.2

28

—–


Scenarios 2 – base:

This Scenario assumes that SNAP splits the difference between FB Revenue Per user and Twitter Revenue Per user.

SNAP

FB

TWTR

Revenue Per User North America

$14.58

$19.38

$9.79

Revenue Per User Rest of the World

$2.36

$2.87(Averaged)

$1.85

North American Users


75 million

183 million

34 million

Non North American Users

97 million

1143 million

130 million

Net Costs Q 2 2017

630 million

4,920 million

612 million

Revenue

1322 million

9321 million

573 million

EBITDA (loss)

692 million

million

(39 million)

P/EBITDA ratio(current Market Cap)

5.4

28

—–

Scenarios 3 – aggressive:

This Scenario assumes that SNAP matches Facebooks Q2 Revenue Per user.

SNAP

FB

TWTR

Revenue Per User North America

$19.38

$19.38

$9.79

Revenue Per User Rest of the World

< p>$2.87


$2.87(Averaged)

$1.85

North American Users

75 million

183 million

34 million

Non North American Users

97 million

1143 million

130 million

Net Costs Q 2 2017

630 million

4,920 million

612 million

Revenue

1731 million

9321 million


573 million

EBITDA (loss)

1101 million

million

(39 million)

P/EBITDA ratio(current Market Cap)

3.4

28

—–

As can be seen from the charts above, Snapchat does not have to grow to become a successful profitable standalone company. Just by monetizing its existing, mostly North American, user base, SNAP will have a respectable P/EBITDA ratio between 3 and 12 at current market prices. While higher earnings would likely lead to higher costs in the form of more R&D, hosting costs of $0.61/user are still relatively low and growing revenue/users will only reduce R&D costs per user due to a larger base audience.


Using Facebooks P/EBITDA(28) ratio as a benchmark, SNAP should be worth anywhere from $106/share (aggressive) to $27/share (conservative) with a base valuation of $67/share. That being said, it takes most growth companies years to achieve these valuations and I would not be surprised to see SNAP stay under $20 for quite some time.

Insider Ownership

While fellow technology peers Twitter and FB appear overvalued compared to SNAP, none of this really matters so long as the lockup expiration releases a flood of shares to the market and causes the stock to crash. That being said, Bobby Murphy and Evan Spiegel (the two co-founders of SNAP) recently released a statement saying that they would not sell any shares until 2018. With the recently released statement from the two co-founders, a flurry of selling seems unlikely and downside is limited.


Downside Risk

While daily active user location within North America combined with high user engagement are great for SNAP, downside risk remains due to increased competition. Both Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook are vying for a slice of the Snapchat market by adding some sort of disappearing message service to their platforms. We have seen what Facebook can do in the past with the elimination of Myspace and acquisition of Instagram. To survive, SNAP will have to demonstrate its ability to retain customers by building some sort of competitive moat.


At the moment, SNAP is still growing Daily Active Users and has diversified beyond disappearing messages to include TV shows from big players such as NBC & Warner Bros in addition to original content. The addition of TV shows is huge for SNAP since it creates a moat which will be very hard for Facebook to breach. While things look good so far, investors should be concerned if DAUs start declining on a consistent quarterly basis.

Conclusion

Snapchats stock has been hammered over the past few days because of ea rnings misses and slowing growth. However, investors are treating Snap like an established company focused on earnings, instead of a growing company that just began monetization. At this stage, daily active user growth/retention is more important than earnings. With 30 minutes per day of time from 75 million people in North America, SNAPs high user engagement should allow the company to monetize existing North American users at or above Twitters $9.74/quarter. Any growth is just icing on the cake. Furthermore, short-term risk is limited due to both Murphy and Spiegel promising to not sell shares until 2018. While downside risks remain regarding competition from Instagram and Google, SNAPs video partnerships with NBC/ Warner Bros combined with continued DAU growth should allow the company to survive for some time. For those with the stomach to survive a turbulent 2017, SNAP is a worthy long-term bet.

Disclosure: I am/we are long SNAP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The Author shorted Snap from 19 to 13$ but has since closed the position.

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