Is Snap worth its valuation given its advertising proposition?

Despite strong ad revenue, Snapchat is seeing widening losses and slower user growth.

Is Snap worth its valuation given its advertising proposition?

The owner of Snapchat is the latest US social media company to come to the stock market with a heady valuation. Though investors are split on whether Snap shares will turn out to be like that of Facebook or Twitter.

Founder Evan Spiegel faced tough questions on Snap’s investor roadshow last month. The company’s decision to cut its valuation from an initial high of $25bn (£20bn) to a more modest range of $19.5bn-$22.2bn told its own story.

Snapchat revealed that it has 161 million daily active users and annual revenues jumped sevenfold
to $404m last year. "Substantially, all of our revenue comes from advertising," Snap said in its IPO
prospectus, referring to features such as sponsored lenses, geo-filters and "brand stories".

Snap also faces pressure from Facebook, which has launched many copycat features, such as Instagram Stories and WhatsApp’s disappearing status updates

But investors have highlighted that annual loss increased by nearly half to $522m while user growth slowed to just 3% in the final quarter of 2016.

Valuation consultancy Brand Finance estimates that the Snapchat brand (rather than Snap the company) is worth only $1.7bn because revenues are modest and it has yet to prove itself.

And this is a generous figure, according to Robert Haigh, a director at Brand Finance: "To arrive at it, we even used an optimistic forecast of 38% annual growth (to $3.5bn in five years) and have assumed that profitability will kick in to reverse current losses."

There are other doubts. Brands still lack transparency on their Snapchat campaigns, Ben Carter, UK marketing director at Just Eat, says: "Despite guaranteed engagement, it’s difficult to see how Snapchat campaigns perform – beyond top-line metrics – and subsequently how it drives commercial return."

Then there are questions about whether Snapchat can expand beyond its core under-35 user base.

Snap also faces pressure from Facebook, which has launched many copycat features, such as Instagram Stories and WhatsApp’s disappearing status updates.

Jo Sutherland, managing director at Fetch London, still believes Snapchat has an edge. Its ad products are "smartly conceived" and "brand new rather than being reactively developed", she suggests. Verto Analytics, which measures consumer behaviour, also points out that Snapchat has a high retention rate and stickiness with its users.

The real test will be time. Facebook’s shares debuted at $38 in 2012 and halved within six months. Today, they stand at $130-plus after the company diversified. In contrast, Twitter’s stock initially doubled from its $26 debut in 2013 but is now languishing around $16.


YES

 Meri Kupiainen, Chief analytics officer, Verto Analytics

"Snapchat’s hourly audience far exceeds Twitter’s and no other big social platform compares among millennials and teenagers. Its new API has good initial feedback from advertisers – encouraging for monetising the audience in a scalable way."

MAYBE

 Ben Carter, UK marketing director, Just Eat

"Snapchat’s biggest and best-documented challenge is that, for advertisers, it currently lacks clear transparency. It’s clearly an exciting new technology but only time will tell whether it becomes the next Facebook or the next Vine or BlackBerry."

YES

 Jo Sutherland, Managing director, Fetch London

"Today, many things that are brilliant start off being difficult. Snapchat is a platform with a rich emotional connection to its young audience and compelling products."

NO

 Robert Haigh, Director, Brand Finance

"Snapchat can be a useful tool for advertisers, particularly in reaching millennials. However, with a limited range of ad options (whose financial value is unproven) and with uncertain user growth, it is simply not useful enough to justify its lofty valuation."