Date: 03/03/2017 Headquarters: LA, US Target Price: $6.

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Ticker: SNAP Potential: -75% Price: $24.5 (1st day close)

Shares Out.
IPO Profile
11.6Bn
xxxPost-IPO Analysis
Market Cap. $28Bn
Closing Price $24.5
Business Overview
Source: Thomson Reuters Snap Inc. is a US based social media company which draws the majority of its revenue
5 Forces of Porter from online adversising, in its famous camera app, as well as from the sale of comple-
mentary hardware products, namely Spectacles, their camera glasses. The company was
founded in 2011 under the name of Picaboo and went public in March of 2017 in an IPO
priced at $17 a share, valuing it at $24Bn. Snap’s main strengths when facing its main
competitors (Facebook and Twitter) include high user engagement (25-30 min per day),
high ad engagement (2 times Facebook’s) and the ability to display full screen ads. Re-
venues grew from $58Mn in 2015 to over $400Mn in 2016, even though EBIT decreased
Source: Team Estimates further from -$380Mn to -$520Mn due to higher operating expenses including the usage

User Data of Google Cloud’s services as servers. As of the end of 2016, all revenues came from
online advertising and 87% of revenues came from the US.

Key Ratios 2016 2017E 2018F 2019F 2020F 2021F
Revenues ($Mn) 404 1041 1582 2375 3446 4876
EBIT Margin -129% -99% -69% -40% -10% 20%
Net Profit Margin -129% -99% -69% -40% -10% 20%
ROE -34% -30% -46% -65% -31% 47%
Source: Team Estimates
ROC -95% -179% -161% -113% -32% 72%
ROC / WACC WACC 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Cash Cycle (days) 46 7 7 7 7 7
Debt/Assets (D/D+E) 1% 2% 3% 4% 5% 6%
Interest Coverage -389 -1016 -231 -190 -83 250
FCFF ($Mn) -930 -1.057 -1.195 -1.089 -554 666

Source: Team Estimates

Source: Team Estimates

DCF Valuation Scenarios
Value/ Investment Analysis
Scenario
Share
Our analysis suggests Snap is considerably overvalued at $24.5, the closing price in the
Optimistic
first day of trading. Therefore, we issue a sell recommendation for Snap shares based on
(10% Prob. Default,
4% Excess Returns $8.5 a DCF estimated share value of $6.1 supported by a peer derived multiples valuation yi-
and 4% Growth in
Perp.) elding a share value of $5.6-$6.4. The main drivers of this recommendation include (1)
Base large negative FCFF until 2020, the first year of our forecast where Snap has a positive
(20% Prob. Default, operating margin, (2) the lack of a strong, sustainable competitive advantage (features
2% Excess Returns $6.1
and 3% Growth in are imitable) and of high barriers to entry (little to no technology protection and low ca-
Perp.)
pital intensity), which hinder excess returns in perpetuity and (3) a 20% probability, in
Pessimistic
our base case scenario, of Snap not making it through the 10 years until perpetuity, as the
(30% Prob. Default,
0% Excess Returns $4.8 result of an inability to retain its user base and reach positive operating margins and
and 2% Growth in
Perp.) FCFF in the following decade, putting it in a similar profitability situation as Twitter.
Source: Team Valuation

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Revenues P&L
$Thousands 2016 2017E 2018F 2019F 2020F 2021F
Sales 404.482 1.040.768 1.581.654 2.375.486 3.445.593 4.875.916
Operating Costs 895.752 2.004.902 2.602.643 3.227.387 3.677.185 3.770.657
EBITDA -491.270 -964.134 -1.020.990 -851.901 -231.592 1.105.260
D&A 29.115 65.433 73.401 85.510 103.697 130.076
EBIT -520.385 -1.029.567 -1.094.391 -937.411 -335.288 975.183
Interest 1.338 1.013 4.743 4.937 4.034 3.904
EBT -521.723 -1.030.580 -1.099.134 -942.349 -339.323 971.279
Taxes 0 0 0 0 0 0
Source: Team Estimates Net Income -521.723 -1.030.580 -1.099.134 -942.349 -339.323 971.279
Minority Interests 0 0 0 0 0 0
Multiples Net Income (Att.) -521.723 -1.030.580 -1.099.134 -942.349 -339.323 971.279

Source: Team Estimates
Peer Tobin-Q PBV
Facebook 6.3x 6.8x Balance Statment
Google 4.2x 4.3x
$Thousands 2016 2017E 2018F 2019F 2020F 2021F
Twitter 1.4x 2.4x Net PPT 100.585 160.950 252.658 390.464 590.308 873.111
Snap Net Intangibles 75.982 75.982 75.982 75.982 75.982 75.982
Value $5.6 $6.4 Goodwill 319.137 319.137 319.137 319.137 319.137 319.137
($/Share) Fixed Assets 495.704 556.069 647.804 785.583 985.427 1.268.230
Acc. Receivables 162.659 164.084 249.359 374.512 543.221 768.722
Source: Team Estimates
Inventory 0 0 0 0 0 0
Acc.Payables 8.419 23.531 35.760 53.708 77.903 110.242
DCF
Other Op. Assets/Liab -103.298 -121.819 -185.128 -278.044 -403.298 -570.713
Working Capital 50.942 18.734 28.470 42.759 62.021 87.766
(Mn$)
Cash 987.368 2.984.210 1.786.501 678.624 118.257 855.317
Enterprise Value 4410 Other NOA 0 0 0 0 0 0
NOA 987.368 2.984.210 1.786.501 678.624 118.257 855.317
Probability of Failure 20%
Minority Interests 0 0 0 0 0 0
Failure Proceeds 1928 Other Equity 1.518.914 3.488.334 2.389.200 1.446.852 1.107.529 2.078.808
Source: Team Estimates
Total EV 3914 Equity 1.518.914 3.488.334 2.389.200 1.446.852 1.107.529 2.078.808
Debt 15.100 70.679 73.575 60.113 58.176 132.506
Cash 3987
Firm Value 7901
Investment 1.534.014 3.559.013 2.462.775 1.506.965 1.165.705 2.211.314
Debt 15 Financing 1.534.014 3.559.013 2.462.775 1.506.965 1.165.705 2.211.314

Warrants/ Options 797 Source: Team Estimates

Equity Value 7089 FCFF
Shares Outstanding 1157
Value of Share 6.1 $Thousands 2015 2016E 2017F 2018F 2019F 2020F
EBIT -520.385 -1.029.567 -1.094.391 -937.411 -335.288 975.183
CurrentSource:
ShareTeam
Price
Estimates24.5
EBIT (1-T) -520.385 -1.029.567 -1.094.391 -937.411 -335.288 975.183
CAPEX 303.566 125.797 165.137 223.288 303.541 412.880
WACC D&A 29.115 65.433 73.401 85.510 103.697 130.076
ΔWC 135.360 -32.208 9.736 14.289 19.262 25.746
Rf 2.9% FCFF -930.196 -1.057.723 -1.195.863 -1.089.478 -554.395 666.634
Kd 6.7%
Beta 0.97 Source: Team Estimates

Equity Risk Premium 5.7%
Ke 8.5%
WACC 8.5%

Source: Team Estimates

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The team:

Analysts Email Linkedin

Miguel Fernando Guimarães migftg95@gmail.com linkedin.com/in/miguelftguimaraes

Ricardo Maia Ferreira ricardojmaiaferreira@gmail.com linkedin.com/in/ricardojmaiaferreira

Director

Pedro André Seabra da Silva pedroasilvawork@gmail.com linkedin.com/in/pedroassilva

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