SNAP,

A PICTURE IS WORTH A
THOUSAND WORDS!
Aswath Damodaran
The History of Snap

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

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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.
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The Digital Advertising Market: Trends

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With Two Giants!

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Young Companies: The Importance of
Story

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 Snap: A Comparison to other Social Media
IPOs

Google LinkedIn Facebook Twitter Snap

IPO date 19-Aug-04 19-May-11 18-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 80.6 845 218 161

User minutes per day

(January 2017) 50 NA 50 2 25

Market Capitalization
on offering date $23,000 $9,000 $81,000 $18,000 ?

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And the years after..

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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.

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 The Snap Story
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Aswath Damodaran
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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 1,243.10 million shares outstanding in the
company. In addition, I estimate that there are 44.90
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.

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 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) makes i
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 wil

The Assumptions
Base year Years 1-5 Years 6-10 After year 10 Link to story
Revenues (a) $
404 55.00% 2.47% 2.47% Focus on market subset (young) will cap revenues
Operating margin (b) -96.62% -96.62% 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 -39.45% 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 $ 627 -35.81% -$224.50 -$224.50 $111.23 -$335.73
2 $ 972 -5.40% -$52.51 -$52.51 $172.41 -$224.93
3 $
1,506 9.80% $147.58 $147.58 $267.24 -$119.66
4 $
2,335 17.40% $406.21 $323.18 $414.22 -$91.04
5 $
3,619 21.20% $767.16 $537.01 $642.03 -$105.03
6 $
5,229 23.10% $1,207.85 $845.50 $805.06 $40.44
7 $
7,006 24.05% $1,684.95 $1,179.46 $888.59 $290.87
8 $ 8,651 24.52% $2,121.70 $1,485.19 $822.58 $662.61
9 $ 9,774 24.76% $2,420.23 $1,694.16 $561.29 $1,132.87
10 $
10,015 24.88% $2,491.91 $1,744.34 $120.71 $1,623.63
Terminal year $
10,263 25.00% $2,565.65 $1,795.95 $369.67 $1,426.29
The Value
Terminal value $25,791.78
PV(Terminal value) $10,544.72
PV (CF over next 10 years) $946.34
Value of operating assets = $11,491.06
Adjustment for distress $919.28 Probability of failure =
10.00%
- Debt & Mnority Interests $203.87
+ Cash & Other Non-operating assets $3,987.36 Includes IPO proceeds of $3 billion
Value of equity $14,355.26
- Value of equity options $797.45
Number of shares 1243.10
Value per share $10.91 Stock was trading at =
$20.00
Snap: Probability Judgments on Inputs

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Snap: My Value Estimate

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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.

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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?

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