Right. Snap. The $ 28bn “camera company”. I don’t know about you, but every time I think about a “camera company”, the name Kodak comes to mind. Historically, from the top of my head, I can’t find any evidence that this is a promising industry. But I am certain there is a reason for the “gold rush” we saw at Snap’s IPO, so I decided to investigate further. After all, the offer was severely oversubscribed and shares went up 44% above the predicted range last Thursday. So what was the driver for such optimism? Perhaps, the growing user base? Strong sales revenue? The product line? Competitive advantage? The solid governance?
Well, let’s start with users. The fact is that despite all the hype, the growth is slowing down. Last quarter, there was an increase of 5M users compared to a rise of 21M in the second quarter and 10M in the third quarter. Moving to sales performance, the company reported a USD 500M loss in their balance sheet last year. So, growing users or a profitable business is out of our list of potential reasons for this valuation. So, it must be the business. I have to say that now and then, Snap releases some new features that I’d compare with a “Pokemon Go like experience”. Some are enticing and neat, but are they sustainable and what is the inflection point where they will become overwhelming? If the next frontier of user expansion is the older crowd, too many features may pose a challenge.
Moreover, when analyzing some recent developments in the product line, “Spectacles” was kind of cool, but what else is on the table that can keep a “camera company” afloat when we look at the advancements of the imaging technology embedded in our phones or, in a more sophisticated scenario, all the mixed reality headsets that are becoming available? In the same fashion, “Stories”, released last August, extended the usability, improved user experience and potentially reduced churn, but it was not enough to drive customer acquisition at the levels accomplished during the second quarter of the year. Or to put the competition into a halt. In fact, some say that the fact that Facebook cloned the feature shortly after, accelerated Snap’s IPO process, which makes me believe that a durable competitive advantage or a unique business model, different from other social media channels, were not strong assets to compound $ 28bn, as well.
So, with all that laid out, the hope relies on an active governance model where investors may have a say to put the business back on track (not that I agree that this is always the truth, but I will leave it at ease for now). On governance, Snap’s founders have full control of the company, regardless of their role or if they are active or nonactive, and investors have no voting rights in any shape or form. Commonly, this structure would not get a green colored checkmark in a public offer scoreboard and there is no known reason to color code this characteristic in a different way in this case. The only reason for this optimistic valuation is the hope of investors that Snap can offer an alternative to FB's and Google's ad empire, which now, as a second thought, I have to admit that looks sexy in a "medium is the message" way. But this is a promise. A very long bet. And to apply the potential value per user attributed to established social media companies to get to an enterprise value is to say the least a bold move.
I guess my point is: I totally get that 2016 was a dry year for public tech IPOs’ and after AppDynamics was acquired by Cisco, right before the public offer, the market had nothing else to bet on rather than Snap, given the slew rate of “private IPOs” driven by increased investment from hedge funds, mutual funds and corporates. But having said that, does that justify this $ 28 bn enterprise value? This represents almost 59 times Snap’s current sales. In comparison, Facebook was negotiated at 28 times and Microsoft at 3.7 times its revenue on their debuts.
You can call me old fashioned, but despite being a true fan of the "increasing returns theory" coined by W. Brian Arthur and of the goodies of a platform economy, I am very sympathetic of the brick and mortar valuation where profits and sustainability of the business were the main factors driving market cap.
There is a controversial Scottish tale that says that Unicorns became the national animal after the king’s last lion died and could not be replaced. Well, as you may know, Unicorns don’t die. But perhaps now you have a hint about how they are born: in our ability to create myths. 28Bn ones.