SNAP, A PICTURE IS WORTH A THOUSAND WORDS!people.stern.nyu.edu/adamodar/pdfiles/blog/SnapIPO.pdf ·...
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SNAP, A PICTURE IS WORTH A THOUSAND WORDS! Aswath Damodaran
Transcript of SNAP, A PICTURE IS WORTH A THOUSAND WORDS!people.stern.nyu.edu/adamodar/pdfiles/blog/SnapIPO.pdf ·...
SNAP,APICTUREISWORTHATHOUSANDWORDS!
AswathDamodaran
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TheHistoryofSnap
Date EventApril 2011 SpiegelandMurphyfound Picaboo,aphoto-
sharingsite.September2011 Picaboo renamed asSnapchatOctober2013 Launches StoriesNovember2013 Facebooktriestobuy Snapchatfor$3billionJuly2014 IntroducesGeofiltersOctober2014 Triesearly versionofadsOctober2016 StartssellingSpectaclesFebruary2017 Snap announcesIPO
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Snap:ACameraCompany?
¨ Snap’sprospectusstartswiththesewords,“Snapisacameracompany”.
¨ Whenmostpeoplethinkofcameracompanies,theyeitherthinkofold-timecameracompanieslikeKodak,PolaroidandtheJapanesenames,thatareeitherdeadordyingfromdisruptionorGoPro,adisruptorthatcannotfigureouthowtomakemoney.Snapisnotacameracompany.
¨ Inmyview,Snapistryingtocarveanicheforitselfinthesocialmediaspaceasthecompanybuiltaroundthevisualimage.
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TheDigitalAdvertisingMarket:Trends
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WithTwoGiants!
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YoungCompanies:TheImportanceofStory
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Snap:AComparisontootherSocialMediaIPOs
Google LinkedIn Facebook Twitter Snap
IPOdate 19-Aug-04 19-May-11 18-May-12 7-Nov-13 NA
Revenues $1,466 $161 $3,711 $449 $405
OperatingIncome $326 $13 $1,756 $(93) $(521)
NetIncome $143 $2 $668 $(99) $(515)
NumberofUsers NA 80.6 845 218 161
Userminutesperday(January2017) 50 NA 50 2 25
MarketCapitalizationonofferingdate $23,000 $9,000 $81,000 $18,000 ?
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Andtheyearsafter..
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WhatIseeinSnap
1. AnOnlineAdvertisingcompany:IbelievethatSnap'srevenueswillcontinuetocomeentirelyorpredominantlyfromadvertising.
2. Marketingtoyounger,tech-savvyusers:Snap'splatform,withitsemphasisonthevisualandthetemporary,will remainmoreattractivetoyoungerusers.
3. Withanemphasisonuserintensitythanusers:ItisstrikingthatSnap'sprospectusandpublicutterancesbyitsfoundersemphasizeuserintensitymorethantheynumberofusers,incontrasttoearliersocialmediacompanyIPOs.
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TheSnapStory
Aswath Damodaran
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IPODetails
1. Sharecount:Addingupthesharesoutstandingonallthreeclassesofshares,includingsharessetasideforrestrictedstockissuesandassortedpurposes,Igetatotalof1,243.10millionsharesoutstandinginthecompany.Inaddition,Iestimatethatthereare44.90millionoptionsoutstandinginthecompany,withanaverageexercisepriceof$2.33andanassumedmaturityof3years.
2. IPOProceeds:InthecaseofSnap,itisestimatedthatroughly$3billionincash fromtheofferingthatwillbeheldbythecompany, tocovercostslikethe$2billionthatSnaphascontractedtopayGoogle forcloudspaceforthenextfiveyears.
Baseyear Years1-5 Years6-10 Afteryear10 LinktostoryRevenues(a) 404$ 55.00% 2.47% 2.47% Focusonmarketsubset(young)willcaprevenuesOperatingmargin(b) -96.62% -96.62% 25.00% 25.00% MarginsimprovetoGooglelevelsTaxrate 30.00% 30.00% 30.00% 30.00% AfterNOLrunsout,taxedatUSmarginalReinvestment(c) Salestocapitalratio=2.00 RIR= 20.58% ReinvestlikeonlinetechcompaniesReturnoncapital -39.45% MarginalROIC= 59.99% 12.00% Userbase&loyaltyallowforhighROICCostofcapital(d) 9.94% 8.00% 8.00% Startofat85thpercentile;10%failurerisk
Revenues OperatingMargin EBIT EBIT(1-t) Reinvestment FCFF1 627$ -35.81% -$224.50 -$224.50 $111.23 -$335.732 972$ -5.40% -$52.51 -$52.51 $172.41 -$224.933 1,506$ 9.80% $147.58 $147.58 $267.24 -$119.664 2,335$ 17.40% $406.21 $323.18 $414.22 -$91.045 3,619$ 21.20% $767.16 $537.01 $642.03 -$105.036 5,229$ 23.10% $1,207.85 $845.50 $805.06 $40.447 7,006$ 24.05% $1,684.95 $1,179.46 $888.59 $290.878 8,651$ 24.52% $2,121.70 $1,485.19 $822.58 $662.619 9,774$ 24.76% $2,420.23 $1,694.16 $561.29 $1,132.8710 10,015$ 24.88% $2,491.91 $1,744.34 $120.71 $1,623.63
Terminalyear 10,263$ 25.00% $2,565.65 $1,795.95 $369.67 $1,426.29
$25,791.78$10,544.72$946.34$11,491.06$919.28 10.00%$203.87$3,987.36$14,355.26$797.451243.10$10.91 $20.00
IncludesIPOproceedsof$3billion
PV(CFovernext10years)
-Debt&MnorityInterests+Cash&OtherNon-operatingassetsValueofequity
PV(Terminalvalue)
-Valueofequityoptions
Probabilityoffailure=
NumberofsharesValuepershare
AdjustmentfordistressValueofoperatingassets=
Stockwastradingat=
SnapTheStory
TheAssumptions
TheCashFlows
TheValueTerminalvalue
Snapisanonlineadvertisingcompany,withasocialmediaplatform.Itsfocusonthevisual(picturesandshortvideos)andthenow(theybothdisappearafterbeingviewed)makesitattractivetotheyoung.Itwillcontinuetomakeitsmoneyononlineadvertisingwiththefocusstayingontheyoung,connectedportionofthemarketplace.Thefocusonasub-setofthemarketwillcapitsrevenuesmuchbelowthegiants(Facebook&Google)butwillallowittodeliverhighprofitmargins(closetoGoogle).
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Snap:ProbabilityJudgmentsonInputs
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Snap:MyValueEstimate
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AlternativeStories
¨ ThenumbersatthehighendofthespectrumreflectapathwayforSnapthatIcallthe FacebookLight story,whereitemergesasaseriouscontendertoFacebookintermsoftimethatusersspendonitsplatformbutwithasmalleruserbase.Thatleadstorevenuesof$25billionby2027,anoperatingmarginof40%forthecompanyandavaluefortheequityof$48billion.
¨ Thenumbersattheotherendofthespectrumcaptureadarkerversionofthestory,thatIlabel TwitterRedux,whereInstagramandothercompetitorscauseusergrowthtoslow,userintensitytocomeunderstressandadvertisingtolagexpectations.Inthisstory,Snaphastroublegettingpushingrevenuegrowthpast35%,settlingforabout$4billioninrevenuesin2027,isabletoimproveitsmargintoonly10%insteadystateandendsupwithavalueoftheequityofabout$4billion.
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ThePricingContrast!
1. OfferingPrice:ThebankersinitialpricingofSnapisanumberbetween$18.5billionand$21.5billion.
2. Banker’spricecompanies,notvaluethem:Valueisdeterminedbycashflows,growthandrisk,whereaspriceissetbywhatinvestorsarepayingforothercompaniesinthespace.
3. Everythingisrelative:ifinvestorsarewillingtoattachapricingof$12billiontoTwitter,asocialmediacompanyseemingincapableoftranslatingpotentialtoprofits,andMicrosoftispaying$26billionforLinkedIn,anothersocialmediacompanywhosegraspexceededitsreach,whyshouldtheynotpay$20billionforSnap,acompanywithvastlygreateruserengagementthaneitherLinkedInorTwitter?
