Monday, January 27, 2014

Snapchat's Founders Make $3 Billion Bet on Themselves- 12/20/2013


  1. Company fundamentals:
    1. Users: Snapchat 26M (about 10M are active based on estimation) FB 1.19B active users, TWR: 500M, LinkedIn 259M
    2. Revenue: Snapchat, no profitable business model yet, FB 8B, TWR 600M, LinkedIn 1.2B
    3. Total pictures sharing in Nov 2013: 800M, 49% from Snapchat, 43% from FB, 7% Instagram

    What is unique about this company:
    1. Self-destruct messages and pictures, caters to teenager users so that they can send pungent messages. Bad for AD clients because Snapchat lacks detailed knowlege on consumer behavior.- hard to target consumers.
    2. User demographics, mostly teenagers, user purchase power is a concern

    Valuation: (Factors to justify 3B valuation)
    The same as many SSN sites, there is no content costs. The operating margin is projected to be around 30% (same as FB), EV/EBITDA is 25 (39 for FB, 18 for Google). EBITDA should be 120 M, Revenue should be 300M
    Growth potential: the user base is unlikely to grow much because of the application's nature, however, the Snaps sent out will likely to grow if users become dependent on this application. Base case: users grew to 60M (active users 30M), Snaps 500M daily.
    Proposed business model:
    1. AD: 10 M active users, each sends 150 snaps daily. One video/photo AD is embedded in every 20-30 Snaps currently, which means the total audience will be 75M every day ($3 per 1K viewers, based on and other online media rates)= 82M every year. Or based on FB's AD revenue per user $5.7 forecast the revenue per share to be $4, the Revenue will be about 120M
    2. Virtual goods: avatars, emoji, gifts. suppose the revenue per user $5, the Revenue will be 150M.
    Total revenue sums up to 270M, which is near 300M to justify 3B revenue but.....
    1. User loyalty: SSN users are fickle, especially those teenagers.
    2. Competition: intense competition, and technology are disrupting
    Bubble. Giants such as FB and TWR should develop applications like Snapchat themselves and leverage their market power, strengthen user interaction.

  2. -Function:
    Users can send “snaps”, including photos, videos to chosen recipients and set a time limit for how long recipients can view their snaps, from 1 to 10 seconds. After the time limit, the snaps will be deleted automatically.

    Disposable photos are an important character to attract users. But a few users take advantage of that character.

    -High users liveness
    Main users are between 13 and 23 years of age
    30 percent of Snaps are sent to groups.
    80 percent of Snapchat's users are located in the US.

    Snapchat: More than 30 million users send about 400 million "snaps" one day.
    (June 2013: 200M photos-> Sep 2013: 350M -> Nov 2013: 400M)
    Facebook: 1 billion users share 350 million one day.
    Instagram: 50M photos one day

    Although no ads on snapchat currently, investors think ads on snapchat can be more effective compared to FB, Twitter.
    (When use FB, users can skip the ads. When use snapchat, users have to hold the screen before they can see photos. )

    Private value = Growth rate x Hypothetical revenue potential x Strategic value to potential acquirers
    Snapchat has low potential revenue but high growth rate and high value to potential acquirers.

    Young people are quick-change. Compared to Pinterest, another photo sharing app valued at 4 billion dollar, main users are housewives and mothers.
    Ads on IM apps can be offensive by users easily.
    No revenue generator has been found yet.

  3. Snapchat Inc.

    Business model
    • Instant message communication software
    • Sending photographs and videos
    • Self-destruction within a few seconds
    • Temporary nature of the message

    Revenue model
    • No defined revenue model right now
    • No revenue is generated by this company

    Fund resources
    • Managed to raise $73 million in venture funding

    Core competence
    1. Product and service
    • High-frequency and strong-form communication; accurate and relevant; local search
    • Privacy
    • Suitable for teenage; easy to make mistakes; no negative effect; racier message
    • Suitable for financial people; SEC
    2. Technology advantage; Uploading pictures faster than competitors’ products
    3. Powerful user base
    • Snapchat has a total current user base of roughly 36 million globally
    • Uploading more than 396 million pictures daily of Nov, 2013; higher than Facebook (347m); Instagram (57m) and Flickr
    • Facebook is currently generating $8 billion of revenue
    • Revenue of $500 million will keep the company’s value at 3 billion Article from Business Insider

    Possible revenue points
    • Advertising
    • Virtual good transactions
    • Building application programming interface (API) ; applications from third parties

  4. Prospective revenue generating model:
    -Advertising:traditional data mining for demographic data to piece together and target user profiles; personas, with which Mobile keyword based in-text search will soon replace a large percentage of banner ads
    -Visual Goods Sale:Emotions, visual gifts….

    -Fast growing user base: this 2 year-old company now has a total current user base of more than 30 million globally.
    -Increasing frequency of use:Snapchat had 100 million users sending more than 110 million snaps daily as of June 2013. By October 2013, that number grew to 350 million snaps per day. Snapchat announced recently that it sees over 400 million snaps sent per day, which is more than Facebook’s daily photo uploads.
    -Trend in Tech industry and social network: mobile and tablet dominant platform gives Snapchat tons of opportunities.
    -Ability to raise fund: so far, raised $123 million in venture funding, most recent one is a serious C preferred approximately $55 Million, Price per share for the serious C funding: $34.08, indicating a value of 2 billion

    -Revenue generating model not defined
    -Fierce competition from social media giant like fb and other mobile application developer

    -Per-user-value: price range of $100 - $110 per user, gives a value of more than 3 b, fb and twitter has user worths of about $94 and $106 respectively