SNAP, A PICTURE IS WORTH A THOUSAND WORDS! Aswath Damodaran

Transcription

1 SNAP, A PICTURE IS WORTH A THOUSAND WORDS! Aswath Damodaran

2 The History of Snap Date April 2011 September 2011 October 2013 November 2013 July 2014 October 2014 October 2016 February 2017 Event Spiegel and Murphy found Picaboo, a photosharing site. Picaboo renamed as Snapchat Launches Stories Facebook tries to buy Snapchat for $3 billion Introduces Geofilters Tries early version of ads Starts selling Spectacles Snap announces IPO 2

3 Snap: A Camera Company? Snap s prospectus starts with these words, Snap is a camera company. When most people think of camera companies, they either think of old-time camera companies like Kodak, Polaroid and the Japanese names, that are either dead or dying from disruption or GoPro, a disruptor that cannot figure out how to make money. Snap is not a camera company. In my view, Snap is trying to carve a niche for itself in the social media space as the company built around the visual image. 3

4 The Digital Advertising Market: Trends 4

5 With Two Giants! 5

6 Young Companies: The Importance of Story 6

7 Snap: A Comparison to other Social Media IPOs Google LinkedIn Facebook Twitter Snap IPO date 19-Aug May May-12 7-Nov-13 NA Revenues $1,466 $161 $3,711 $449 $405 Operating Income $326 $13 $1,756 $(93) $(521) Net Income $143 $2 $668 $(99) $(515) Number of Users NA User minutes per day (January 2017) 50 NA Market Capitalization on offering date $23,000 $9,000 $81,000 $18,000? 7

8 And the years after.. 8

9 What I see in Snap 1. An Online Advertising company: I believe that Snap's revenues will continue to come entirely or predominantly from advertising. 2. Marketing to younger, tech-savvy users: Snap's platform, with its emphasis on the visual and the temporary, will remain more attractive to younger users. 3. With an emphasis on user intensity than users: It is striking that Snap's prospectus and public utterances by its founders emphasize user intensity more than they number of users, in contrast to earlier social media company IPOs. 9

10 The Snap Story 10 Aswath Damodaran 10

11 IPO Details 1. Share count: Adding up the shares outstanding on all three classes of shares, including shares set aside for restricted stock issues and assorted purposes, I get a total of 1, million shares outstanding in the company. In addition, I estimate that there are million options outstanding in the company, with an average exercise price of $2.33 and an assumed maturity of 3 years. 2. IPO Proceeds: In the case of Snap, it is estimated that roughly $3 billion in cash from the offering that will be held by the company, to cover costs like the $2 billion that Snap has contracted to pay Google for cloud space for the next five years. 11

12 Snap The Story Snap is an online advertising company, with a social media platform. Its focus on the visual (pictures and short videos) and the now (they both disappear after being viewed) make the focus staying on the young, connected portion of the marketplace. The focus on a sub-set of the market will cap its revenues much below the giants (Facebook & Google) but The Assumptions Base year Years 1-5 Years 6-10 After year 10 Link to story Revenues (a) $ % 2.47% 2.47% Focus on market subset (young) will cap revenu Operating margin (b) % % 25.00% 25.00% Margins improve to Google levels Tax rate 30.00% 30.00% 30.00% 30.00% After NOL runs out, taxed at US marginal Reinvestment (c ) Sales to capital ratio =2.00 RIR = 20.58% Reinvest like online tech companies Return on capital % Marginal ROIC = 59.99% 12.00% User base & loyalty allow for high ROIC Cost of capital (d) 9.94% 8.00% 8.00% Start of at 85th percentile; 10% failure risk The Cash Flows Revenues Operating Margin EBIT EBIT (1-t) Reinvestment FCFF 1 $ % -$ $ $ $ $ % -$ $52.51 $ $ $ 1, % $ $ $ $ $ 2, % $ $ $ $ $ 3, % $ $ $ $ $ 5, % $1, $ $ $ $ 7, % $1, $1, $ $ $ 8, % $2, $1, $ $ $ 9, % $2, $1, $ $1, $ 10, % $2, $1, $ $1, Terminal year $ 10, % $2, $1, $ $1, The Value Terminal value PV(Terminal value) $25, $10, PV (CF over next 10 years) Value of operating assets = $ $11, Adjustment for distress $ Probability of fai10.00% - Debt & Mnority Interests + Cash & Other Non-operating assets Value of equity - Value of equity options Number of shares Value per share $ $3, $14, $ $10.91 Includes IPO proceeds of $3 billion Stock was tradin$20.00

13 Snap: Probability Judgments on Inputs 13

14 Snap: My Value Estimate 14

15 Alternative Stories The numbers at the high end of the spectrum reflect a pathway for Snap that I call the Facebook Light story, where it emerges as a serious contender to Facebook in terms of time that users spend on its platform but with a smaller user base. That leads to revenues of $25 billion by 2027, an operating margin of 40% for the company and a value for the equity of $48 billion. The numbers at the other end of the spectrum capture a darker version of the story, that I label Twitter Redux, where Instagram and other competitors cause user growth to slow, user intensity to come under stress and advertising to lag expectations. In this story, Snap has trouble getting pushing revenue growth past 35%, settling for about $4 billion in revenues in 2027, is able to improve its margin to only 10% in steady state and ends up with a value of the equity of about $4 billion. 15

16 The Pricing Contrast! 1. Offering Price: The bankers initial pricing of Snap is a number between $18.5 billion and $21.5 billion. 2. Banker s price companies, not value them: Value is determined by cash flows, growth and risk, whereas price is set by what investors are paying for other companies in the space. 3. Everything is relative: if investors are willing to attach a pricing of $12 billion to Twitter, a social media company seeming incapable of translating potential to profits, and Microsoft is paying $26 billion for LinkedIn, another social media company whose grasp exceeded its reach, why should they not pay $20 billion for Snap, a company with vastly greater user engagement than either LinkedIn or Twitter? 16