May 28, 2017 - 4:34pm EST by
2017 2018
Price: 21.22 EPS -0.58 -0.34
Shares Out. (in M): 1,432 P/E 0 0
Market Cap (in $M): 30,387 P/FCF 0 0
Net Debt (in $M): -3,243 EBIT -1,155 -528
TEV (in $M): 27,145 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Snap Inc. (SNAP) is a six year old self-described “camera” company which goes to market primarily through the Snapchat mobile application. Snapchat differentiates itself from other communications and social networking apps (like Facebook, Instagram, WhatsApp, Google Messenger, Weibo, Line, WeChat, et cetera) by having pictures and messages that auto-delete from the recipient of the message. The company offers users creative tools like Lenses (interactive animations overlaid on people’s faces) and Bitmojis (cartoon images around a user’s human traits) to improve engagement with the platform.


SNAP was co-founded by Evan Spiegel (you can learn more about his background from this puff piece in Vogue Italy from 2015 ) and Robert Murphy while they were at Stanford. Spiegel -- age 26 -- and Murphy -- age 28 -- control the company through super voting shares that give them control of roughly 89% of the votes. The publicly traded stock is non-voting. It is worth noting that neither Spiegel nor Murphy have any experience working for any other companies.



In order to provide adult supervision, SNAP hired 39 year old former J.P. Morgan equity research analyst Imran Khan as its “Chief Strategy Officer” to help the company create a story to pitch to the street. SNAP paid Khan 7.1mm shares of restricted stock (over $120 million at the $17/share IPO price) as an inducement to get him to join the company.


As of Q1 2017, Snapchat had 166 million daily active users who generate over 3 billion snaps (short videos and images) a day. The average Snapchat user opens the app 18 times a day for a total of around 30 minutes. 85% of SNAP’s U.S. daily active users are between the ages of 13 and 34 implying the company already has 50% of U.S. residents in that age range as users. (Its worth noting SNAP has been accused by a former employee of intentionally inflating its reported user numbers while it was a private company. Snap usage is heavily skewed towards its younger users. Users 25 years and older visited Snapchat approximately 12 times for about 20 minutes a day in 2016 versus users younger than 25 who visited over 20 times for over 30 minutes a day.


SNAP generates revenue primarily through advertising. SNAP offers advertisers three main types of ad formats: 1) Snap Ads – traditional video ads inserted into the user experience, 2) Sponsored Geofilters – advertiser sponsored tools that can be incorporated into a user’s snaps, and 3) Sponsored Lenses – advertiser branded animations that can be overlaid on a person’s face or surroundings. Conceptually, SNAP grows revenue by either increasing its number of users, increasing the pricing it charges advertisers, or by increasing the number of ads it delivers to its users. SNAP also sells $130 “spectacles” – glasses with built in cameras to allow people to take pictures from their own perspective. Spectacles generated roughly $8 million in revenue in Q4 implying the company sold around 65k units.  


On March 2nd, SNAP priced its initial public offering of 200 million shares at $17/share, valuing the company at roughly $24 billion or 60x 2016 revenues. Interestingly, SNAP went public by selling nonvoting shares; investors have given complete control to the company’s 26 year old CEO and its 28 year old Chief Technology Officer. Spiegel was granted an additional 3% of the entire shares outstanding of the company for completing the IPO.


Snapchat’s products are not proprietary and the company faces direct competition from some of the largest Internet companies in the world. Facebook (FB) in particular has been aggressive in copying Snapchat’s functionality for its Instagram platform and more recently for Facebook. Just last month FB added the disappearing messages feature to Instagram. Instagram’s Stories feature – a blatant knock off of Snapchat’s Stories – has over 200 million daily active users, i.e. more than the entire snapchat user base. It’s worth noting that Facebook spent a significant amount of time at its F8 Developers’ conference in April talking about its camera effects platform -- ie its products meant to compete with SNAP.


In Asia, Naver (a large Korean internet company and an affiliate of Line) launched a Snapchat knock off product called Snow. Snow has been downloaded over 100 million times since it was launched in September 2015 and has 40 to 50 million users – more than the 36 million times Snapchat has been downloaded in Asia.


Snapchat has seen significant deceleration in user growth starting in the second half of 2016 -- ie right after the launch of Instagram Stories. On a sequential quarter basis SNAP’s global daily active users in second quarter of 2016 grew at 17%, the third quarter at 7%, and the fourth quarter at 3%. Sequential user growth accelerated to 5% in Q1 2017 likely due to the normal seasonality for app downloads (people get new phones for Christmas and download new apps in January.) We don’t think it is any surprise that SNAP’s user growth slowed significantly after the early August 2016 launch of Instagram’s stories feature. It is also worth noting that as SNOW has gained scale, SNAP’s user growth in Asia (its reported Rest of World segment) has stalled.


Source: Company Reports


Comscore data suggests that SNAP continues to see deceleration in usage through April continuing a pronounced trend since the start of the year.