It’s easy to argue that Snap Inc (NYSE:SNAP) stock is overvalued. Even backing out $3 billion-plus in cash, SNAP stock trades for about 55x 2016 revenue. That ~$400 million in sales led to an Adjusted EBITDA loss of $459 million, and cash burn of $677 million, according to the Snap Inc S-1. Obviously, SNAP stock is going to grow, backed by its flagship Snapchat app.
But as InvestorPlace feature writer James Brumley pointed out in March, it will take a lot of growth to get Snap Inc anywhere close to supporting its valuation under traditional metrics.
What about non-traditional metrics, then? One of the issues with valuing unprofitable growth stocks is that traditional metrics aren’t available. SNAP stock has a negative price-to-earnings multiple and EV/EBITDA multiple. Peer comparisons in terms of revenue are difficult as well. Social media peers like Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR) are at different points in their growth.
Looking at other metrics around the Snap Inc business, the knee-jerk bearish argument is a little weaker. SNAP stock still looks overvalued, and the company’s first earnings report, due later this month, seems likely to move the stock. But Snapchat is a real product, with real demand. And if the company can improve on some of these metrics, SNAP stock might not be headed for the quick decline so many investors project.
SNAP Daily Active Users
Snap Inc closed 2016 with 158 million daily active users (DAUs). This figure will be closely watched in the Q1 earnings report, because DAU growth did begin to slow in the second half of 2016. The figure grew 7% in Q3, but was “relatively flat in the latter part of the quarter,” per the S-1. Growth decelerated again to 5% in Q4.
The company’s $22.5 billion enterprise value suggests that, at the moment, SNAP stock is worth about $142 per each of its 158 million DAUs. In contrast, Facebook — with an enterprise value of $395 billion, and 1.23 billion DAUs — is worth about $321. Twitter, oddly, doesn’t release DAU numbers, disclosing only DAU growth. Instead, Twitter releases its larger monthly user figure, which was 328 million at the end of its first quarter.
On that basis, Twitter is worth about $30 per user – but given that the daily user figure is smaller, the EV/DAU figure is higher. Assuming that DAU is half of MAU (a reasonable assumption), Twitter’s valuation would be closer to $60 per user.
That seems to make some sense. A Snapchat user isn’t worth as much as a Facebook user. Facebook has better reach, a more established advertising platform and it has embedded itself into daily life. Twitter has been a disappointment in terms of monetization — Snapchat’s potential, at least at the moment, would seem to suggest a higher per-user value. (Some TWTR bulls might disagree.)
One other interesting data point: Zynga Inc (NASDAQ:ZNGA), a struggling, basically zero-growth social gaming player, is worth about $77 per user on an enterprise basis. SNAP stock, at the same multiple, would be valued at about $15, despite significantly higher growth potential.
Snapchat Average Revenue Per User (ARPU)
Snap Inc is going to get better at monetizing Snapchat — and it’s already doing so. ARPU (average revenue per user, on a quarterly basis) better than tripled in Q4. Globally, Snap Inc generates $1.05 in revenue per user per quarter; in North America, the figure is $2.21.
Both figures are well below peers. Twitter (using DAUs) generated about $3.34 in its first quarter. Facebook monthly users contributed $4.83 on a global basis; in North America and Canada, the figure was almost $20. (Facebook figures exclude Instagram and WhatsApp.)
Here, too, a potential pillar of a SNAP stock bull case becomes more clear. What happens if the company’s ARPU moves beyond that of Twitter and even closer to Facebook? Tripling ARPU not only triples revenue, but adds a significant amount of relatively high-margin revenue and gets Snap Inc closer to profitability, at least on an Adjusted EBITDA basis.
And the combination of user growth — Snapchat’s base is still less than one-tenth of Facebook’s monthly users — and per-user revenue means overall sales growth remains torrid for years. That, in turn, would allow SNAP stock to grow into its valuation.
SNAP Stock Bulls Aren’t Crazy
To be sure, there’s not enough in these metrics to necessarily build a bull case for the stock on their own. But on a per-user basis, at the least Snap Inc’s valuation doesn’t look quite as ridiculous as a 55x sales figure would sound.
But the potential is there. What we will learn over the next few quarters is whether Snap Inc can execute well enough to drive the stock higher.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.