Snapchat: The Supposed $25 Billion Dollar Company
Roughly five years ago, the social media industry was about to undergo an industry-altering change, a change that many Yeshiva University students would view as for the better. In September of 2011, Evan Spiegel and Bobby Murphy became famous for creating Snapchat, a revolutionary social media app which allows users to send a disappearing image. Spiegel became inspired after he heard countless stories of people scouring Facebook and untagging themselves from photos or even photoshopping pictures, fearing their world would crumble if anyone found out they had a pimple on the 38th day of 9th grade. He knew there had to be a solution. Along with his partner, he built the Snapchat app in order to, as he put it, avoid conforming to “unrealistic notions of beauty or perfection but rather creating a space to be funny, honest or whatever else you might feel like at the moment you take and share a Snap.” This article addresses Snapchat’s rise from startup to flirting with being a $25 billion dollar company.
How Has Snapchat Grown Over the Years?
In an age of permanence and regret, Snapchat carved their niche by creating a way to prevent that permanence. The app allows its users to send pictures and videos to their friends, which they have done using platforms such as Facebook and WhatsApp, only with this service, the images disappear ten seconds after they are opened by the recipient. Riding this signature feature, Snapchat has become a social media giant, accumulating over 200 million monthly active users. This figure trails only Facebook, Instagram, Whatsapp and Twitter.
Like these social media trailblazers, Snapchat has had to figure out how to convert these users into revenue. By utilizing a clever approach of location based advertisements, Snapchat has seen their revenue rise from $50 million in 2015 to an expected revenue between $250 and 350 million in 2016. They believe they will become a $1 billion company by 2017 and only grow from there.
The Initial Public Offering (I.P.O.)
An I.P.O. is the first sale of stock by a private company to the public on the stock exchange. It allows the company to raise funding by issuing equity to shareholders. Over the last several years, the I.P.O. market has seen several industry giants decide to test the public market, and Snapchat appears as though it will be the next one that decides to do so. If Snapchat gets their target I.P.O. valuation of upwards of $25 billion, it would make them the biggest company to go public in the U.S. since Alibaba cleared a smooth $167.6 billion I.P.O. in 2014.
Is Snapchat Worth $25 Billion?
Just this past May, Snapchat received a valuation of roughly $18 billion, leaving some investors skeptical of the expected $7 billion jump in just a few short months. Granted, the previously discussed user data leaves little room for debate that Snapchat is an extraordinarily popular app which has exhibited tremendous growth since its founding; however, there is plenty of room to be skeptical about a $25 billion valuation.
Their projected revenue growth to a billion dollar company over the coming years appears to be a stretch at best. As shown in the first chart, 71% of Snapchat’s current revenue comes from video advertisements within the the application, while 21% comes from location based ads. If Snapchat expects to hit $1 billion by 2017, they would be well served to find other ways to earn significant revenue. Of additional concern to their revenue growth plan is the company’s user demographics. Currently, 45% of their users are made up of people aged 18 to 24, while the 55 and older demographic accounts for a mere 7% of their users. In comparison to some of other big social media players, this 55 and older range produces 25% of Facebook’s users, 20% of Twitter’s users and 16% of Instagram’s users. This could leave them susceptible to a high rate of customer attrition (users leaving the app), as younger demographics can switch their likes and dislikes in somewhat of a spontaneous manner.
Addressing the $25 billion valuation directly, one recent precedent would seem to imply this figure is out of whack, while another recent precedent may support the valuation. In 2014, Facebook famously acquired WhatsApp for $22 billion; in other words, Facebook paid $55 for each of their 400 million users. Applying this formula to Snapchat’s roughly 200 million users lends a value of about $11 billion. On the flipside, when Alibaba went public on September 19, 2014, their revenue was $2.7 billion, which is close to 7.5 times greater than Snapchat’s expected 2016 revenue. Taking the multiple of 7.5 and $25 billion leaves Snapchat’s desired I.P.O. right in line with Alibaba’s $167.67 billion I.P.O. Ultimately, time will tell just how valuable Snapchat is or isn't.