Author: JD

Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company. The leaked offer could be a trial balloon of sorts to help Snapchat raise its next round, which was reportedly set to value the firm at $3.5 billion. The external market view of the company was recently that it would have little trouble raising a huge docket of cash at that price. However, the proposed round hasn’t closed, despite rapid growth in the number of “snaps” that Snapchat users send each day in recent months. Turning down $3 billion is a difficult choice for anyone. To do it on the back of no revenue and a product aimed at a fickle market category is downright gutsy. What is $3 billion in market value today? Well, we can stack that market value against Twitter’s recent IPO to come up with revenue analogs that answer the question: At Twitter’s IPO, and day-one valuation, what was its revenue-to-valuation ratio? We can then apply that to Snapchat, both today and in the future, to estimate how much top line Snapchat will have to earn to grow into its valuation at its current levels, and at a later exit or public offering, provided that it reaches either. Or, put another way, we can get some rough numbers of how far Snapchat has to run the revenue game from its current place at the starting line to be a sensibly valued company. We’ll dig in shortly regarding the veracity and fairness of the comparison, but we can make the simple point that Twitter and Snapchat are social, mobile-first messaging platforms that have in their youth both faced public worries about their ability to monetize. I am not at all trying to say that Snapchat should make even a fraction of Twitter’s revenue, but instead that by drawing broad parallels there is quite a bit that we can learn. We begin with Twitter. Twitter Let’s set aside the fact that Twitter loses money. Snapchat does as well. That in mind, we’ll focus on revenue. Twitter, in the trailing 12 months (TTM) leading to its final private quarter (ending September 30), had revenue of $534.5 million. This is calculated using the provided nine-month figure for 2013, and then deducting the nine-month 2012 figure from the also provided full-year 2012 figure, and then summing the two (S-1). Twitter filed to go public at $26 per share. Using a fully diluted share count of 705,098,594, Twitter valued itself at $18.3 billion. The company opened instead at $45.10, valuing the firm (again: using a diluted share count) at $31.8 billion. Comparing those figures to Twitter’s top line, the company valued itself at 34.2 times its trailing 12 month’s revenue. Its forward revenue figure would be substantially less, of course. The market valued Twitter at $31.8 billion, instead, or 59.5 times its trailing revenue. With these two numbers, we can now turn to Snapchat, and see the range of revenues that it will have to generate to trade at Twitter’s valuation range, and also where it will want to be if and when it goes public. Snapchat Younger technology companies are less focused on revenue than more mature firms in the market category. Therefore, the following data points are unfair. However, we are being unfair on purpose, as Snapchat’s valuation implies that it will eventually earn revenues of a certain level. Therefore, we can calculate the revenue deficit that the company currently finds itself in, provided that it does carry on as an independent company, something that I find doubtful. If it does, however, it will need revenue and, eventually, profit. And, given that investors are willing to value Snapchat in the 10-figure range, I don’t think that comparing its metrics in this way to Twitter is too mean; investors are betting that Snapchat will be a hit on par with Twitter later on in its life. We’ll first compare a few revenue marks for Snapchat using Twitter’s own set value-to-revenue ratio: Snapchat value: $3 billion. Twitter’s value-to-revenue ratio: 34.2. Implied Snapchat revenue deficit at this valuation: $87.7 million (TTM, but we can just call it 12 months to be relaxed) Snapchat value: $3.5 billion. Twitter’s value-to-revenue ratio: 34.2. Implied Snapchat revenue deficit at this valuation: $102.3 million (repeat the above caveat) Snapchat value: $4 billion. Twitter’s value-to-revenue ratio: 34.2. Implied Snapchat revenue deficit at this valuation: $117 million (repeat the above caveat) And, for fun, Snapchat at $6 billion, or twice the valuation that Facebook reportedly offered, which makes for a fun 2X multiple, for the purposes of calculating potential return and the like: Snapchat value: $6 billion. Twitter’s value-to-revenue ratio: 34.2. Implied Snapchat revenue deficit at this valuation: $175.4 million (repeat the above caveat) What value is there in calculating revenue deficit? Essentially, it shows how much progress the company has to make to simply be worth a very frothy, money-losing valuation such as the one that Twitter attached to itself, as part of its IPO. Now, public investors have a high view of Twitter, in that they are valuing the firm at a much higher value-to-revenue ratio, implying that they are willing to value each dollar of Twitter higher than the company was able to before its IPO. Now, this will lead to a lower implied revenue deficit for Snapchat, but the data is worth seeing. We repeat the above: Snapchat value: $3 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $50.4 million (TTM, but we can just call it 12 months to be relaxed) Snapchat value: $3.5 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $58.8 million (repeat the above caveat) Snapchat value: $4 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $67.2 million (repeat the above caveat) And, for fun, Snapchat at $6 billion, or twice the valuation that Facebook reportedly offered, which makes for a fun 2X multiple, for the purposes of calculating potential return and the like: Snapchat value: $6 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $100.8 million (repeat the above caveat) – There is a perverse little joke going around the Valley at the moment that it is almost better to put off revenue as long as you can, so that you can sell your company for more money. Start to monetize, à la Tumblr, and struggle, à la Tumblr, and you might only get a mere billion dollars! Investors that are betting on Snapchat at the above value points are making one of two wagers: That someone will either be stupid enough (Yahoo), or scared enough (Facebook) to buy Snapchat for a valuation multiple of at least two. Or, that Snapchat is a killer business, and that it will best and blow past the above revenue ranges, on its way to becoming a firm ripe for the public markets. If the latter, they must have calculated how far from zero they are, in that they are pre-paying for Snapchat revenue that has yet to be born. And they are paying a premium for it. Recall that if you grow your valuation too quickly, it can be hard to find an acquirer. And you just might have to turn to a friend for help. Well, once your valuation is in the billions, there is no room left for friends or family to bail you out – only fools if you are lucky enough. Scoff at the Snapchat valuations that are being tossed around and you will be told that there are so many ways for Snapchat to monetize. Just look at Facebook! I don’t believe it. Facebook’s data graph is why its advertising system works; Snapchat deletes – theoretically – the information that it could use to target advertisements. So, that’s about where I see Snapchat at the moment. A fun app, and one that I am using more, but one for which I have a hard time understanding the numbers buzzing about its head.