Editing Snap
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'''Valuation''' | '''Valuation''' | ||
Our $ | Our $27, 12-month price target is based on 18x 2018E EV/Sales, a slight premium to peers on a growth-adjusted basis, given our expectation for sustained hyper growth and potential upside risk to our estimates. | ||
Key risks | Key risks | ||
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Snap is a venture stage investment in the public markets, something unseen in recent years where nearly all internet companies waited until later stages of growth and profitability to go public. This clearly carries a higher than normal risk profile – Snap generates negative gross margins, is burning more cash than it is generating revenue, and we do not expect it to break even on an adjusted EBITDA basis until 2019. The company also has an unusually concentrated voting structure, senior management with no prior C level experience, and faces significant competition from platforms like Google and Facebook that are considerably larger, more profitable and better resourced. | Snap is a venture stage investment in the public markets, something unseen in recent years where nearly all internet companies waited until later stages of growth and profitability to go public. This clearly carries a higher than normal risk profile – Snap generates negative gross margins, is burning more cash than it is generating revenue, and we do not expect it to break even on an adjusted EBITDA basis until 2019. The company also has an unusually concentrated voting structure, senior management with no prior C level experience, and faces significant competition from platforms like Google and Facebook that are considerably larger, more profitable and better resourced. | ||
That said, Snap has a large, valuable, and highly engaged user base that occupies a unique space in the demographic (Exhibits 7/8). That engagement generates high value advertising inventory that should allow Snap to follow the now well-worn path of mobile monetization. While the public market has no recent experience valuing an internet company at this early a stage, at this scale, we believe the opportunities from growth in users, engagement, and monetization more than offset the considerable risk inherent in what is essentially venture investing through public equity. Therefore, we initiate coverage with a Buy rating and a 12-month target of $ | That said, Snap has a large, valuable, and highly engaged user base that occupies a unique space in the demographic (Exhibits 7/8). That engagement generates high value advertising inventory that should allow Snap to follow the now well-worn path of mobile monetization. While the public market has no recent experience valuing an internet company at this early a stage, at this scale, we believe the opportunities from growth in users, engagement, and monetization more than offset the considerable risk inherent in what is essentially venture investing through public equity. Therefore, we initiate coverage with a Buy rating and a 12-month target of $27. | ||
'''Key Investment issues''' | '''Key Investment issues''' | ||
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We forecast CAGR over the next 5 years of 78% as the company monetizes its existing base of users, growing ARPU from $2.81 to $27 (Exhibit 2), and growing DAUs from 158mn to 278mn. At that scale we estimate that the company can generate gross margins of 77% and adjusted EBITDA margins of 27%. That said, given Snap’s early stage the range of outcomes over the forecast period is far wider than normal (Exhibit 14). | We forecast CAGR over the next 5 years of 78% as the company monetizes its existing base of users, growing ARPU from $2.81 to $27 (Exhibit 2), and growing DAUs from 158mn to 278mn. At that scale we estimate that the company can generate gross margins of 77% and adjusted EBITDA margins of 27%. That said, given Snap’s early stage the range of outcomes over the forecast period is far wider than normal (Exhibit 14). | ||
'''Valuation and key risks''' | |||
Our $27 12-month price target is based on 18x 2018E EV/Sales, a slight premium to peers on a growth-adjusted basis, given our expectation for sustained hyper growth and potential upside risk to our estimates. | |||
Key risks to our investment thesis include increased competition, volatility and unpredictability of key reported metrics like DAUs, corporate experience and execution risk given rapid expansion of workforce as well as the relative inexperience of the management | |||
team. We further explore the risks and valuation methodology beginning on page 32. | |||
==Company background== | ==Company background== |