A New Digital Marketing Favourite? The $25bn Snapchat Conundrum


Posted on Feb 14, 2017

The USP of Snapchat is of course that activity on the mobile app is self deleting, something that many appreciate over the likes of Twitter, and something which the new President of the United States might have wished for from time to time.

The problem and the best advantage for Snap Inc, the parent company of Snapchat, which has just announced its intention to IPO on the New York Stock Exchange, is that it is the last in a long line of tech sector wonder stocks, owned by twenty something founders heading to Billionaires Row.

This colours our perception in the sense that between us being envious, jaded, and perhaps fearful that this may be a float too far, we are having to analyse a company which is unconventional even by the standards of say a Facebook or a Google.

Indeed, the cause is not helped by the way the company itself  says it “may never achieve or maintain profitability.” This may be one of the most honest disclaimers ever in the history of the financial markets, something which shareholders of Twitter might have appreciated, over a decade into its story.

The best description of its financial trajectory is to have been running just to stand still, even with the celebrity endorsement (so to speak) of a certain D. Trump. But perhaps we are looking at the Snapchat valuation wrongly?

It has a better demographic than Twitter, and is a much cooler brand. In terms of the self deleting content, it is a winning formula playing against a world in which cyberwars and hacking are commonplace, and we would all like to have the right to be forgotten. This is particularly the case given the undoubted use of Snapchat’s largely teenage user base and the way that, to put it mildly, much of the content exchange will be of the “sexting” variety.

While this may leave some red faced, given the porn angle in so much of what has driven the internet since its beginnings over 20 years ago, ignoring this aspect could be a mistake. Such a niche would be enough to justify the bull argument for Snapchat.

Perhaps the exception which proves the rule as far as the attempt at putting a value on the latest would be tech stock giant is the way the conventional stock market valuation metrics have not exactly panned out as many would have expected, from the time of the Dotcom bubble onwards.

We have witnessed from the examples of YouTube, Skype and even an earlier failed attempt by Facebook to buy Snapchat for $3bn, that it is not usually the actual P&L which is important in the new economy – the likes of Apple notwithstanding.

There are plenty of other ways to the kind of $25bn valuation the IPO for Snapchat could deliver. For instance, off the back of 150m daily active users, or last year’s $1.8bn funding round being a tenth of the total notional company valuation. Another metric which may be worth noting is simply the rocketing price of tech assets. Whereas 10 years ago $1bn or $2bn was a punchy number for Google to take over YouTube, and Microsoft paying near to $10bn for Skype regarded as eye watering, the bar was certainly raised by Facebook’s $19bn takeover of Whatsapp in 2013. Therefore, it can almost be said that $20bn plus is now effectively the “going rate” for hot silicon valley and/or tech plays.

There is a problem for the optimists in that if one follows the example of Twitter – which peaked at a valuation of nearly $70bn in 2014, it may be we are in an environment of “peak” Social Media. This is especially the case if the big players such as Facebook can simply copy a variation of upstarts like Snapchat, rather than paying through the nose as they have in the past.

Clearly, Snapchat is both a brand and a database, and this makes it a very valuable company, even if the Snap part of Snapchat is stripped out or ceases to have the wow factor it is currently supposed to. At the same time according to Patrick Tsang, Chairman of Why Media, the value of Snapchat is not as a marketing platform in the traditional sense, but by brand association.”  This may not be something that would be shareholders might appreciate, especially as brand association is a rather grey way to serve up a multi billion Dollar price tag.