A Snapshot…of Snap’s S-1 filing

Snap, Inc. made its grand S-1 entrance on Thursday (2/2) with an official filing with the SEC.

Talking heads instantly dissected the 200+ page document–everything from its financials to its user growth averages and ending with a potential valuation question.

If we had to describe the filing in one word…it would be “aggressive”. 

There’s a lot to digest, breakdown and have a ‘snap’ judgment about, but here are the basics. $SNAP’s official filing is for a $3bn cash raise. Whether the company wants to be compared with Facebook or Twitter is another discussion…but in comparison, Facebook raised $16bn and Twitter raised $1.8bn — so this placeholder is likely in the ballpark.

The lead underwriters on this mega deal will  be: Morgan Stanley, Goldman Sachs & Co., J. P. Morgan, Deutsche Bank Securities, Barclays, Credit Suisse, Allen & Company LLC.  The co-managers and other firms to be listed with this deal have not been listed.

Let’s look at the positives and negatives associated with the filing and then look to the future. 

POSTIVES

Revenue growth and average revenue per user has climbed significantly. While Snap is a young company…not many have a balance sheet that sees revenues grow nearly 600% in one year (58.7mm to $404.5mm).

In 2017, Snap is targeting sales of $1bn, which would be roughly 150% growth, and is eyeing a $25bn valuation. That number may be a sticking point as the CEO, Evan Spiegel, would receive a $750m bonus if $SNAP earns that valuation on pricing day.

The average revenue per user (ARPU) has also grown at a significant pace and places Snap in a positive light. The global ARPU for 2016 was $1.05 as compared to $0.31 for 2015. To compare this with Facebook — each $FB user is worth $4.83.

Another big positive has to be the user & engagement-level. The app’s 158 million daily users send, on average, over more than 2.5 billion snaps a day as of the end of the fourth quarter of 2016. 

But arguably one of the biggest things going for Snap is the high-profile, high-visibility nature of the company. And helping the cause is the fact that a peer, Facebook, continues to trade near all-time highs. Don’t mind you that $FB struggled in its early days as a public company. Retail investors will talk about and likely clamor to be involved with this stock… based little on financials or what’s in the latest filings…. but more on feelings. Furthermore, there will be “pressure” on some to ‘not miss the next Facebook’. 

It may be our opinion, but just like the Facebook, Twitter and even Google IPO (if you want to go way back)…this individual deal may bring a ‘different type of investor’ to the table and could drive demand in ways not seen before.

NEGATIVE

The scrutiny of the company is just starting. Is the user-base of $SNAP one that is loyal enough to deserve such a price tag? Is there a user-growth problem? If they indeed call themselves a ‘camera company’…why will they not flop like GoPro?

They lost how much money last year? 

And that’s not even getting into the skepticism of a $400mm annual server contract with Google or the $157.5m paid to settle an ‘ousted founder’ lawsuit.

The ARPU number is something to brag about, $1.05 per user–up from $0.31. But in the same breath, has the company already saturated its user growth? Snap added only six million new daily active users between July and September of 2016. The three months prior, Snapchat had added 18 million users or triple that.

Many expected Snap Inc. to be heavily in the red when it came to financials overall and indeed the numbers reflected just that. Snap recorded a net loss of $514.6m and negative free cash flow of $677.7m last year. The $514.6m loss is a 38% increase from 2015.

Now, about that valuation. If $25bn is the market cap Snap is eyeing — let’s look at this on a price/sales basis. At $404.5mm, a $25bn valuation would mean a ratio of 62 times last year’s sales. 

Wow. Aggressive much?

If shareholders are  not scared off by large losses or an aggressive valuation…then maybe the governance of the shares to be sold could do the trick. The Class A shares, which will be offered in the IPO, will have no voting power. 

WHAT NEXT?

Many expect Snap to add terms to its IPO toward the end of March setting up for debut late 1Q or early 2Q. One can expect additional filings going forward which could clarify items in the first S-1 and/or add underwriters and co-managers to what will likely be the most high-profile deal of 2017.

And you can expect IPO Boutique to be on top of the Snap Inc. IPO every step of the way.