I recently found out via Twitter during #Blogchat (thanks +rhonda hurwitz!) that Facebook offered to buy Snapchat for $3B. In case you don’t know what Snapchat is (read: you’re old), it’s yet another social network which allows you to send messages and pictures with an expiration date up to 10 seconds in the future. I can’t tell you what was intended but Snapchat seems to serve two purposes. First, it allows you to send silly, possibly embarassing pics to friends without the fear of it going viral on the interwebs. Second, it allows horny teenagers (and adults) to send “nudes” to each other without fear of it going viral on the interwebs. Snapchat attempted to make it a challenge to screenshot snapchats but based on what I’ve also learned from Twitter, that challenge was conquered fairly easily quite some time ago. So if you don’t want your junk or lady parts scattered all over the world wide web, you might want to think twice before clicking send on that steamy photo to the person you met 18 min ago.
My first question was why would anyone in their right mind do such a thing. My second question was how does someone running Snapchat pass on such a ridiculously generous offer. After letting my impulse response subside, I thought it’d be interesting to try to figure out a scenario where I wouldn’t take $3B for an application with seemingly limited long-term value. So let’s try to piece together what Facebook might be thinking.
Option 1: Acquire Snapchat for its assets
I suppose you could argue the biggest asset Snapchat has to offer is intellectual property and it’s mailing list. So let’s assume for a moment that Snapchat makes no money for the foreseeable future, so advertising revenue is off the table, which leaves Snapchat with little more than it’s user base to offer Facebook. The number I keep seeing through around on various sites online is that 26 million users in the U.S., so let’s make it 25 million for ease of calculations that will follow in this post.
So for the sake of argument, let’s assume Facebook just wants access to Snapchat users and their email addresses. That would make each email address worth $120 each. They can probably find better return on investment than this purchase; I know I’d give up my email address for less than $120.
Option 2: Acquire Snapchat for current cash inflow + future potential
Snapchat isn’t going much in the way of generating revenue at the moment but again let’s take a look at this from Facebook’s perspective. Now, the most common way to value a company by using a multiple based on valuation of established companies that provide a similar service. There are different multiples people look at to value companies but for this discussion I’m going to use the Price/Earning (P/E) multiple. I chose this one because 1) I think it carries the most weight in practice and 2) it’s the easiest to understand. Everyone knows stock price and everyone knows earnings per share (EPS).
If you’re not a numbers person, this is your cue to bow out gracefully…
After getting intrigued by this, I started to do some light research and here are some interesting facts based on a few minutes I spent on yahoo finance:
Technology sector has a P/E multiple of 22.03
Information service provide industry = 41.50
Yahoo = 23.26
Google = 28.08
I excluded Facebook because I don’t think it’s established enough in the market to be a reliable comparison point, but if you’re wondering, its P/E is currently 118.24. Additionally, Snapchat doesn’t provide the same breadth of service as Yahoo or Google so I included a discounted P/E of 15 as another reference point. You’ll see in the graphic below I made some assumptions about usage of Snapchat and assumed ads are attached to all “snaps” that go out.
Like many other tech companies, looks like Snapchat is grossly overvalued
Even with the conservative estimates, ads are pricey (impression ads are sold by the 1,000 for the price I calculated above for an individual impression), and once you consider the fact that the ads have a 10 second shelf-life AND the primary audience (call it 18-29) probably isn’t prone to buying on a whim from a phone ad, Snapchat should’ve taken that deal and run as fast they could. Amazing what greed does to the human brain.
Think I’m missing something here? Let me know in the comments.