The much-anticipated Snap S-1 was filed last week, so the question now facing investors is whether the company is worth more or less than its most recent private funding round. We think there would be ample demand for Snap’s $3 billion IPO because public investors haven’t had such an opportunity to invest relatively early in a growth asset recently. But after reading Snap’s S-1 filing, a lot of questions come to mind. Below, we pose the Top 10 questions you always wanted to ask, but were afraid to know.
- How high can Snap’s monetization go?The positive surprise from Snap’s S-1 is that Snap is very early in its monetization. Snap earned $2.15 per user in North America versus almost $20 earned by Facebook per user, and an estimated $8-10 earned by Twitter (on a smaller user base in the U.S.). The takeaway is that Snap has a significant runway and opportunity. Facebook has shown if you execute well, there is significant upside. Snap has been doubling its monetization rates on a year-by-year basis, and that is one of the biggest positives.
- What can Snap do to reaccelerate its user growth?One of the biggest red flags in the S-1 has been the slow fade in growth rate of the daily active users on Snap. Historically, Snap has done well with growing and engaging its user base by regularly launching new and innovative products. Snap has also done well with identifying and acquiring innovative start-ups that have become foundations for new and innovative products. So, the question becomes, what does Snap’s product roadmap look like over the next 12-24 months?
- When does Snap expect to become cash flow break-even?Snap earned more than $400 million in the past 12 months, but burned more than $600 million in cash. Snap’s recent deal with Google Cloud will help make one of its biggest expense items fixed rather than variable. In fact, Snap hasn’t shown a hint of profitability. Revenue has grown six times in past 12 months and losses have increased 150% during that time.
- What is Snap’s long-term hardware strategy?We were surprised to read the first line in Snap’s S-1 filing, “Snap, Inc. is a camera company.” Okay, we aren’t going to take this as literally as it sounds. So, an entirely relevant question is whether Snap’s hardware strategy is similar to Amazon’s or to Google’s? In other words, should we expect a wider rollout of Spectacles, followed by Spectacles 2.0 and then more wearables coming along the way?
- Is Snap worried about Instagram?Media reports hint that the recent launch of Instagram Stories has affected Snap’s user growth. Today, Instagram has more active users and has an 800-pound gorilla sitting in its corner – Facebook. From a valuation standpoint, we think Instagram is among the best comparable to Snap today. If you feel comfortable with assigning, say, 10% of Facebook’s value to Instagram, then Snap’s expected IPO valuation of $20B+ sounds reasonable!
- Does Snap envision a future where it will operate multiple Mobile Apps?Both Google and Facebook have done well executing this multi-app strategy. Twitter has had a couple of false starts. Would Snapchat have separate apps to communicate to discover content and to create content?
- Will Snap produce professional content?Snap is a rare technology company with headquarters near Hollywood. Will it be hard for Snap to resist becoming a media company? Netflix and Amazon have successfully implemented this strategy. (Google and Facebook are a bit shy of the red carpet.) Will Snap create professional content in the future?
- What is Snap’s ad-tech strategy?Online advertising has evolved into the battle between walled gardens – Facebook and Google. We think this has created obstacles in measuring digital advertising effectiveness on a level playing field. In turn, this has arguably slowed the secular shift of TV ad budgets to online channels. We think Snap can take advantage of more TV ad dollars waiting to move online by providing best-in-class online/offline ad measurement tools.
- How should we think about employee stock and potential dilution?Media reports hint that Snap has a relatively higher proportion of unvested employee stock options versus companies such as FB, SQ, and TWTR at their respective IPOs. Plus, there is potential dilution from Snap Foundation.
- Will Snap focus on emerging markets in the near future?Snap’s S-1 talks about the attractive skew of its user base towards developed markets with large mobile ad spenders. We believe a global communications platform would need to have presence in emerging markets. However, this might come at a significant cost. Only time will tell whether this strategy, and others, will ultimately pay off.
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