Snap launched its IPO amidst a huge hype. Several investors were surprised to see that a tech company has gone public even before earning profits. The stock value soared to $29, much higher than the original valuation. Now that the buzz is settled, Snap shares cost $19 which is still a modest price. At this value, the market capitalization of Snap is $23 billion. The lack of profitability is under constant scrutiny and it has garnered a lot of criticism. The skepticism is justified, but the company could become huge if it manipulates the user base in the right way.
According to Snap’s S1 filing, monetization began only in 2014. The business model is immature with no strong leaders. However, the tech potential of the Snapchat app is incomprehensible, but Instagram poses a huge threat. While Snap is compared to other tech companies like Facebook and Google, it must be understood that Snap can’t be compared to the tech giants both in terms of age and growth.
The revenue of Snap has continued to grow since 2014. In Q4 2016, Snap earned $166 million, up from $128 million in Q3. Snap’s revenue increases by 404% annually. In the upcoming quarters, the growth rate will slow down dramatically, but it can’t be denied that the growth is impressive. The gross margin has also improved in the past few quarters. Snap showed a gross profit of $12.3 million which is about 7% of its revenue. Snap should focus on improving its operating profits too, but at this stage, it is understandable because the advertising platform needs numerous modifications. Snap is still focusing on improving monetization to increase revenue.
Snap’s potential is further enhanced by the partnership with Vice to create 8 original shows exclusively airing on Snapchat. Rapper Action Bronson will participate in setting up different couples. This means that Snap is taking the first step to becoming a content delivery network instead of just a social network. With many more exclusive shows, the revenue potential for Snap will increase without a doubt.
The major risk for investors investing in Snap is the growth of Instagram. Mark Zuckerberg owns Instagram and he is unapologetically copying every single feature of Snapchat. The Stories on Instagram is a mere copy of Stories on Snapchat. The launch of Instagram put a brake on the growth of Snapchat users. In the last quarter of 2016, Snapchat only added 5 million daily active users and this was when Instagram launched Stories.
With the current growth, Snap will reach $1 billion revenue in 2017 and double it in 2018. Snap will be a winner in the stock market if it could increase its daily active users. Snap is projected to be worth more than $50 billion in 2020 if it has 300 million daily active users. The P/S multiple of Snap would then become 8.3X similar to Facebook. Snap’s future could either be a massive success or an utter failure depending on Snapchat’s ability to gain daily active users.