- Part 3 of our 2015 IPOs series covers the Square IPO & Snapchat IPO.
- We take you through revenues and valuations of these companies.
- We roundup the key facts that prospective investors should note about these IPOs.
In the 1st of our 3 part series on tech IPOs in 2015, we covered the Box IPO, the Dropbox IPO and the Airbnb IPO, followed by another set of exciting 2015 IPOs, the Uber IPO and the Spotify IPO. In our 3rd part of this series, we’re going to look at Square and Snapchat to conclude our series on upcoming IPOs in 2015.
Square is a merchant services aggregator and mobile payments company that reportedly began to work towards an IPO way back in the last quarter of 2013. The Square IPO, much like the Box IPO, has been delayed for quite some time, in fact longer, now that the Box IPO is finally happening (on 23 Jan 2015).
Why The Square IPO Is Grabbing Eyeballs
Based in San Francisco, California, Square has a high profile founder and CEO in Jack Dorsey, one of the founders of microblogging site Twitter. Square has raised about $590 million in 7 rounds of funding, with the latest one valuing the company at $6 billion, as on October 2014.
As one would probably imagine, Square also has a long list of high profile investors like Richard Branson, Marissa Mayer, Starbucks, Visa, Sequoia Capital, Tiger Technology Global Management, Morgan Stanley, Goldman Sachs, Citi Ventures, Barclays Capital, JP Morgan Chase & Co and the Government of Singapore Investment Corporation (GIC) among others (Phew!).
As you'd expect, such companies are often acquisition targets for the usual suspects, and reportedly, that’s the case here as well. According to a report about Square by Re/code, both Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), which have their own online payment services, have considered acquiring Square. (Also See: Google stock analysis and Apple stock analysis)
Square Revenue Model
Square charges a transaction fee of about 2.75% of every transaction, and then passes on about 70% to 80% of that to credit card companies. A report on theverge.com, pegs Square transaction volume at about $30 - $40 billion, and another report on the Wall Street Journal pegs Square Revenue (Gross) at $1 billion in 2014.
Numbers from both these reports point to a transaction volume ranging from $30 - $40 billion, with gross revenues in the range of $825 million to $1 billion. Assuming that only 70% was passed on to credit card companies, Square revenue (net) should be about $300 million.
Latest Square valuations of about $6 billion go to say that Square is valued at a Price to Sales ratio of 20. With the cost of Square revenue being about 70% to 80%, and that excludes sales and marketing costs, it’s difficult to see the model being too very profitable. Square is diversifying into data analytics among other things. However, based on the data on hand, Square valuations seem to be steep. With the Box IPO finally coming through at discounted valuations, one would wonder if that could be the fate of the Square IPO.
Snapchat IPO rumors have found new fuel in the fact that Snapchat recently hired Imran Khan, the investment banker who led the Alibaba IPO. Snapchat is still in its infancy as a revenue generating business. However, being the first of the ephemeral messaging services, where messages disappear after a preset time, Snapchat has received a lot of attention.
Why The Snapchat IPO Is Grabbing Eyeballs
Snapchat was the first of its clan of ephemeral messaging services and understandably, it caught the attention of tech biggies Facebook (NASDAQ:FB) and Google in 2013. In November 2013, Facebook offered to acquire Snapchat for $3 billion, followed by a $4 billion offer from Google not long after. (See: Facebook stock analysis)
Subsequently, Facebook worked on developing several competing apps like Poke and Slingshot, before eventually acquiring WhatsApp for a whopping $19 billion.
Snapchat has raised close to $650 million in 6 rounds of funding from the likes of Chinese internet giant Tencent, Coatue Management, Kleiner Perkins Caufield & Byers, the Government of Singapore Investment Corporation (GIC) and Yahoo (NASDAQ:YHOO) , which was one of the investors in Snapchat’s latest round of funding. (See: Yahoo stock analysis)
Well, here’s thing the thing. While Snapchat valuations have risen like mercury in a boiler, the Snapchat revenue story is an entirely different one altogether.
Snapchat began advertising as recently as October last year, and not much is known about how that has progressed. The company is also believed to be exploring the money transfer and content discovery businesses to monetize its user base. Reports suggest that Snapchat’s user base is about 100 million monthly active users (MAUs).
Some might have criticized Snapchat’s decision to decline billions of Dollars from two internet giants back in 2013, but the fact of the matter is that Snapchat has not only lived to tell the tale, but has done it in style. Snapchat valuations stand at $10 billion following its latest round of funding in December 2014.
There aren’t any Snapchat revenue numbers to go by, so we’ll just have to look at a similar acquisition to evaluate Snapchat valuations. Facebook acquired WhatsApp at $19 billion, and the latter had about 450 million MAUs at the time, implying a valuation of about $42 per user. By that logic, Snapchat valuations shouldn’t exceed $4.2 billion.
A Snapchat IPO could mean that valuations spike further. However, until Snapchat generates substantial revenue, all of this makes for an inspiring story, but not a compelling IPO investment rationale.