Snapchat – Salad days.

Reply to this post

Snapchat very unlikely to escape the bubble bursting.

• If Evan Spiegel really thinks that the tech market is currently a bubble then there is hope.
• It would imply that are plans already in place for when the torrent of easy money dries up which are certain to include monetisation and rapidly becoming self-sustaining in cash terms.
• However, in the bursting of said bubble, he would have to accept that his company (currently valued at $15bn) is not quite as valuable as he would like.
• I think that 2015E is a critical year for the Instant Message (IM) chat players as growth in users is rapidly slowing down and it is a very crowded market.
• Consequently, I see the focus rapidly moving to monetisation as it is revenue generation that will define who succeeds and who fails.
• With nearly 100m daily active users, of whom 65m send something every day, Snapchat has great engagement but no revenue to speak of.
• The good news is that Snapchat is already moving to explore how it can monetise its users through targeted and relevant advertising.
• The bad news is that as engaged as its user base is, it has a fundamental weakness in that Snapchat users have very little money to spend because they are so young.
• This will make advertisers less willing to spend a lot of money advertising to these users but I can see a case centred on long term brand building.
• Snapchat also appears to be firmly on the road to an IPO and has ruled out an acquisition.
• This makes the need for monetisation even more acute as revenue growth is one of the prime requirements to be successful in going public.
• Revenue is the next big hurdle for Snapchat but I struggle to see even in the best instance how a valuation of $150 per daily active user can be justified.
• RFM research indicates that Google, which is the master of monetisation via advertising, generates $25.1 per year for each iOS user and $13.2 per year for each Android user.
• Snapchat’s coverage of the Digital Life pie is only a fraction of Google’s meaning that it can really only hope to generate a fraction of the revenue.
• Even if Snapchat defies all of RFM’s estimates and generates an average of $15 per user each year it will still take 10 years to generate revenues equal to its valuation.
• Profits are another matter entirely and are what public market equity investors value most of all.
• This is why I suspect that even though Evan is planning for the worst, he needs to keep his fingers crossed and hope that the bubble does not burst before he can get his IPO away.