- The Snapchat IPO, due in 2017, is expected to be the biggest tech IPO after Alibaba's.
- Reports suggest that Snapchat is eyeing stratospheric valuations, at 25-35 times 2017 sales.
- Even by the most conservative estimates, the IPO could unlock huge upside for FB stock.
We live in an age of unicorns. More specifically, tech unicorns. And they all share a few common traits - stellar growth, astronomical valuations and most often, heavy losses. Snapchat is one such unicorn which matches at least two, if not all of the above criteria. Snapchat's rise in a crowded space became even more interesting after the ephemeral-messaging platform audaciously declined a $3 billion cash acquisition offer from social networking giant Facebook (NSDQ:FB). Since then, Facebook has done everything it could to dent, if not kill Snapchat, albeit not very successfully so far. Yet ironically, FB stock could well be the biggest beneficiary of a Snapchat IPO if it comes in 2017.
Copying Snapchat Seems To Be Helping Facebook, Finally
When you think of tech companies which rejected buyout offers, quite a few not so great stories come to mind. Starting with Yahoo (NSDQ:YHOO), which rejected Microsoft's (NSDQ:MSFT) $44.6 billion offer, to Groupon (NSDQ:GRPN), which shunned Google's $6 billion buyout offer, many similar decisions have proven to be bad ones in hindsight. Snapchat is one of those few exceptions that have lived to tell the tale. At least for now. However, Facebook seems rather determined to leave no stone unturned in its fight against Snapchat.
Way back in 2012, Facebook introduced Poke, a near exact replica of Snapchat, followed by Slingshot in 2014, both of which didn't do too well. Later in 2015, Facebook introduced ephemeral messaging features within its Messenger app. That was followed by a roll out of Instagram Stories (like Snapchat's Stories feature), which allows users to share images and videos with all of their followers, making them available for up to 24 hours. Apparently, the feature is catching on, and "is already used by 100 million people every day." The feature was also reportedly being tested in Australia last month. And the attack intensified towards the end of the month, with Facebook adding/testing a host of other features:
"On Friday came the news that Facebook is testing a new camera in its main app that offers Snapchat Lens-style photo and video filters to users. " says the post on Guardian, adding two more observations, "Then on Saturday it was revealed that Facebook has also launched Snapchat-style filters in Facebook Live as a special Halloween feature." and "On Monday, TechCrunch reported that Facebook tried to buy the Asian snapchat clone Snow. Like Snapchat, Snow features, you guessed it, a large portfolio of filters and masks."
Last but not the least, Facebook's latest salvo is a work-in-progress feature like Snapchat's Discover section, dubbed Collections. Reports suggest that Collections will "showcase lists of curated content from publishers directly in the News Feed", which could potentially help Facebook tackle its much talked about 'fake news' problem, while also taking on Snapchat. Like we mentioned earlier, not all of Facebook's attempts have ended well. However, as long as the focus is on features like curated news, which could solve its existing problems, the process could end up being very effective. And we all know that Facebook undeniably has the scale to threaten Snapchat. But, irrespective of whether or not Facebook manages to seriously dent Snapchat, FB stock looks well positioned to gain from the latter's IPO anyway.
FB Stock Could Gain Anyway
If you look at it another way, a successful IPO for Snapchat could actually be great for Facebook. Snapchat reportedly has about 150 million daily active users, obviously dwarfed by Facebook's 1.18 billion. Reports suggest that Snapchat could rake in about $250-350 million in revenue this year, and potentially take its tally to $1 billion next year. With that, Snapchat plans to raise upto $4 billion in its IPO, which is rumored to take place early next year, potentially valuing the company at $25-35 billion. In other words, that's 25X-35X 2017 sales.
While Snapchat is projected to grow at rates Facebook is unlikely to match, the latter is probably one of the best all-in-one packages around in the tech space today. Even with its massive revenue base, Facebook grew sales at 56% YoY, while managing a net profit margin of ~34% in its latest quarter. The growth is very much there, both in terms of sales growth and earnings growth. To top it all, the company just announced a $6 billion buyback. And like we mentioned earlier, Facebook's user base towers head and shoulders above that of Snapchat's. All of this comes at under 14 times sales. And that's trailing twelve month sales, unlike Snapchats 1 year forward multiple of 25 to 35 times 2017 sales.
FB Stock Valuations
If Snapchat does manage to go pubic at those valuations, FB stock looks poised to gain the most. Assuming a significantly slower growth of 25% over Facebook's TTM sales number, FB should easily deliver close to $31 billion in revenue in 2017. At Facebook's current sales multiple, the stock could be worth $147 a share, which implies a healthy ~25% upside potential from its last traded price.
However, if Snapchat can command a sales multiple of 35, it might not be insane to value FB stock at half that multiple, which would imply an upside potential of nearly 59%, to $187 a share. While Snapchat's projected IPO valuations seem to be quite out of whack, as it appears, FB stock could turn out to be a much better bet.
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