Snap Inc, formerly Snapchat, went IPO last Thursday. IPO price was 17 but it rose to close at 24, achieving nearly 42% return on the first day.
Snap has 158m daily active users who spend an average of 25-30 minutes on the app per day. It reported revenue of $404m and net loss of $515m in 2016. With market value of 24 billion, the valuation multiple is nearly 60x P/S. Note, that’s P/S, not P/E. In comparison, Facebook debut at P/S of about 24x.
The popular question in the market is will it trade like Facebook or Twitter?
Facebook’s share price has risen by 260% in 5 years since its IPO in May 2012.
Twitter’s share price has fallen by 63% in 3.5 years since its IPO in Nov 2013
No analyst in the market recommend a Buy on Snap. My call is SELL. I think its price chart is likely to look like Twitter’s in 3-4 years.
Snap’s age demographics is dominated by young people. 85% of its 158m daily users are in age group 18 – 34 years old and just 15% are above 35 years old.
The problem with this demographics is that when they become more mature, they may quit the apps. Just like most gamers are young, but as they grow older, they quit gaming.
In order to be a sustainable business, Snapchat has to constantly engage the users and make them develop a dependency on the app. If its young user base drop the app when they become mature, then Snapchat will have problem growing or even maintaining its user base. This is one risk it is facing.
If Snapchat does retain its young user base, then in order to grow, it will eventually have to target older demographics group. This becomes a whole lot of different challenge.
I don’t really use Snapchat app, so I’m not familiar with its functions. I did try it out but find it non-intuitive. I guess I’m considered old. But bear in mind, if I find the app hard to use, we should expect a lot of people experiencing the same thing.
Snapchat also faces competition from the mighty Facebook + Instagram + Messenger. Facebook app can do way more things than Snapchat app. Facebook app is also easier and more straight forward to place the ads to target users, while Snapchat ads look confusing to me.
Any valuation on Snap will have high margin of error. It’s currently making 500m losses on 400m revenue. Current valuation of 60x P/S is just out of the mind. I can’t value this company and will certainly not pay for P/S of 60x.
Twitter did quadruple its revenue in 3 years, but it can’t generate profit yet. I believe Snapchat can double or triple its revenue in few years time, but it will have problem generating meaningful profit. For anyone who want to make money investing in Snap, good luck.