Snapchat Progresses Towards An IPO

  • Snapchat recently raised an additional $175M at a $16B valuation.
  • The company monetized its rapid growth and user engagement and is expected to generate $300M in 2016.
  • Snapchat IPO is estimated to take place in 2017 and should attract investors’ attention.

The messaging app Snapchat recently completed its eighth funding round, raising $175M ($30.72 per share) from Fidelity Investments at a $16B valuation, bringing the total amount raised since inception to more than $1.3B. Snapchat is one of the most prominent unicorns in the private market that could threaten Facebook's (NASDAQ:FB) dominance in the social media market. As shown in the chart below Facebook’s eco-system that includes Facebook, FB Messenger, WhatsApp and Instagram controls a major share of the social media market with 3 of the top 4 properties.

Also read: Will Snapchat Steal Facebook's Thunder In Video Ads

Statistic: Leading social networks worldwide as of January 2016, ranked by number of active users (in millions) | Statista
Source: Statista

The biggest competitors for Facebook’s dominance are coming from China with players like QQ, Qzone, WeChat, Baidu Teiba, etc. that are available only in China and adjacent territories. In the global market we see Twitter (NYSE:TWTR), Yahoo's (NASDAQ:YHOO) Tumblr and Microsoft's (NASDAQ:MSFT) Skype that are among the market leaders; however, these companies have been around for many years but haven’t managed to challenge Facebook yet. Snapchat might be at the bottom of the list with only 200 million monthly active users, but the company achieved this user growth in only four years and generates the same number of daily video views as Facebook, which shows the effectiveness and user engagement of Snapchat compared with Facebook.

Snapchat monetizes its incredible growth and engagement by offering advertisements and sponsored content either through Live Stories where advertisers can sponsor photos and video around a particular event, publish content on the Discover section and sell sponsored photo filters. The company is constantly looking to expand its revenue either through new initiatives or partnerships just like the one it signed with Viacom which gave the media giant an exclusive right to sell advertising around Snapchat's content. The biggest boost to its revenues and final proof of recognition by the official advertising market is the wide use of Snapchat campaigns by Republican and Democratic candidates that convinced Snapchat to hire a political ad salesperson to optimize ads sales to this sector.

Snapchat is expected to generate annual revenues between $300M and $350M in 2016 which is more than 3x the 2015 revenues and reflects a steep price-to-sales ratio of 49 for the company. Even though Snapchat has a high revenue multiple that is not sustainable in the IPO market, the fact that the company’s valuation reached a plateau, as shown in the chart below, may suggest not only that investors in private markets are more cautious about private firms’ valuations, but also that Snapchat valuation may have peaked. This usually means that a company maxed out its private market growth potential and should look to the public market's investors for further growth. To do that, Snapchat needs to go public.

Snapchat_chart 2_032216

As a company with less than $1B in annual revenues, Snapchat could file a confidential S-1 to sense the demand for its shares in the public equity market. A potential IPO could take place in 2017. Investors interested in joining the growing market of new social media networks, like Snapchat and Pinterest, should keep both of these IPOs on their radar. Once they file their official S-1, I will be able to revisit my investment thesis.

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