A Review of SNAP
SNAP describes itself as a "camera company", but, most people know the company for its self-deleting messages. Indeed, its flagship product is indeed the Snapchat mobile app, allowing users to communicate through short videos and images, which are called "snaps." On average, its 158 subscribers create over 2.5 billion snaps each day. Here is how the app works. Snapchat opens directly into a mobile device's camera. The user can then take a picture and either send to friends as is, or, add figures like lenses, Geofilters, and Bitmojis. Lenses are interactive animations that are overlaid on a person’s face or the world around them. Geofilters are artistic filters that can be applied after a Snap is taken at pre-defined times and locations. Bitmojis are cartoon likenesses of a user that are created in the Bitmoji application.
Launched late in 2016, SNAP's most aggressive foray to add new products comes in the form of its Spectacles, its sunglasses that make snaps. They connect seamlessly with the Snapchat app and they are capable of capturing video. They cost roughly $130 and come in one size. To date, Spectacles has not generated material revenue for the company, but, SNAP plans to continue making substantial investments this year in marketing, distribution, and inventory as it assesses demand.
SNAP's primarily means of generating revenue is through advertising. It offers a couple different products, including Sponsored Creative Tools, and, Snap Ads with Attachments. Sponsored Creative Tools helps people express themselves using creative provided by its advertising partners. Snap Ads With Attachments are vertical full screen video advertisements in the normal Snap format. It puts these ads in stories and it has enabled interactive attachments so that a viewer can respond to an advertisement directly to watch more content or take an action without leaving Snapchat.
Looking at its results for FY16, revenue surged by 589% to $404.5 million. The growth was driven by an increase in the number of advertisements delivered, due to a 48% bump in DAUs. Average revenue per User (ARPU) increased due to the growth in revenue as a result of the number of advertisements delivered, which outpaced DAU growth during the period.
Cost of revenue, however, more than offsets the revenue at a whopping $451.7 million, representing 112% of revenue. This is a bit of a "catch 22". On one hand, rising cost of revenue is good because it shows increasing user engagement. For some context, cost of revenue consists primarily of payments to third party infrastructure partners for hosting its products. Hosting costs include expenses related to bandwidth, computing, and storage costs. The higher the user engagement, the higher the hosting costs.
Not surprisingly, sales and marketing is another major expense that is impacting the bottom line. For FY16, sales and marketing expense soared 357% y/y to $124.4 million. This was due to an increase in headcount of about 340%.
Overall, SNAP's operating expenses spiked by 110% to $924.9 million, leading to a staggering operating loss of ($520.4) million. Cash burn was even worse at ($677.7) million.
Based on the $17 IPO price, SNAP's P/S stands at about 59x FY16 revenue. If we're too hypothetically assume 250% revenue growth for this year, that brings its forward P/S down to around 17x. Of course, this is before SNAP opens for trading. If SNAP opens at $23, for example, that forward P/S climbs up to about 27x.