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What Matters and What Doesn’t in Snap’s S-1

The first stage of Snap’s roadshow for investors is set to begin after the public release of its S-1, detailing its IPO offering, which could happen by the end of this week. The subsequent pitch to investors will rely both on the user growth, engagement, and financial figures (some of which The Information has learned, including last year’s revenue), and a less tangible argument that it isn’t a social media company, but a different beast entirely.

Notably, Snapchat has roughly 160 million daily active users, said a person with knowledge of the figure, up 23% from about 130 million at the end of the first quarter of last year. But the user growth in the second half of last year was slower than during the first half. The company already has disclosed that 60 million of its daily users were in the U.S., or close to one-fifth of the population, as of last fall. 

The Takeaway
When it comes to reading Snap’s S-1 document to assess the company’s long-term value, some metrics will be more useful than others. Here are the numbers to care about, or simply disregard, as well as user growth and revenue data that hasn’t been previously disclosed.

While the slowing user growth might raise concerns similar to those that have dogged Twitter, the good news for Snapchat is it has about double the number of daily users as Twitter and its advertising is a lot more valuable because it is overwhelmingly video-driven. Still, Snap is no Facebook, which has at least 150 million daily active users in the U.S. who spend at least double the amount of time across its core apps, excluding WhatsApp, as users do on Snapchat.

On revenue, Snap ended up generating close to $400 million in 2016, better than the $350 million that was at the top end of an internal company projection in the middle of last year. That suggests Snap will have an easier time reaching its $1 billion goal for 2017, but there’s still a long way to go to show that it can scale up its ad units. It’s perhaps no surprise that Snap announced on Tuesday it was taking its automated ad-serving tech out of limited testing, just ahead of the expected S-1 filing. (There will be a lot of headlines about how much money Snap is losing overall, but that won’t reveal as much about its prospects as its operating margin and free cash flow.)

Then there’s the intangible part. Behind the scenes, Chief Strategy Officer Imran Khan and others will make the case to investors that Snap is an “innovation” company and can point to a successful product development record that others, including Facebook, have copied. Above all, it will highlight CEO Evan Spiegel’s long-term vision for the company, shepherding the design team and championing products. They include Spectacles, the wearable camera attached to sunglasses, and Lenses, which overlay animations on people’s faces and, probably soon, the rest of the world

When it comes to fairly assessing Snap’s long-term value, some metrics will be more useful than others. Below are the numbers to care about, or disregard, in Snap’s S-1:

MATTERS: Time Spent. The more active time a person spends in the app, the more advertising they can be exposed to. Mr. Khan said in a speech earlier this week that an average user spends a total of around 25 minutes a day on Snapchat after opening it up about 18 times per day. The key question is whether this figure is rising or staying still.

Currently, Facebook says people spend more than 50 minutes a day in Facebook’s suite of apps (Facebook, Messenger and Instagram). That makes for a tough comparison with Snapchat, which is a solo app, but Facebook has been direct with marketers that its advantage is that it can reach users across multiple apps. And then there’s the behemoth, WhatsApp, that doesn’t yet generate revenue but, like Facebook, is one of the most heavily used apps in the world.

DOESN’T MATTER: Monthly Active Users (MAUs). Despite the fact that monthly active users is a common currency for most tech companies, Snap has been adamant both internally and externally that a person who only launches an app once a month isn’t showing enough active engagement in the app to be worthwhile for marketers. (Twitter sticks to MAUs, drawing criticism because the company can’t generate revenue from half of them.) Snap is likely to have well over 200 million monthly active users, but the company has been making the case that that figure doesn’t show the true value of its audience. So it’s best to avoid comparing it to Twitter and Facebook on that level.

Part of Mr. Spiegel’s argument is that Snap can avoid growth for growth’s sake and instead maximize revenue from its concentrated group of users

MATTERS: Average Revenue per User (ARPU). Snap executives regularly brag that they have some of the most high-value, influential users in the world. Part of Mr. Spiegel’s argument is that Snap can avoid growth for growth’s sake and instead maximize revenue from its concentrated group of users. Over the course of 2016, Snapchat generated about $2.70 per daily active user. By comparison, across Facebook’s apps, the global ARPU was less than $4 per daily active user last year. Again, it’s a difficult comparison to make because a much higher percentage of Snapchat’s users are in the U.S. The S-1 should reveal how Snap’s ARPU changed over at least the past year and whether it’s climbing as much as Facebook’s did in the U.S. during the same period.

SOMEWHAT MATTERS: Number of Video Views. For a time last year, Facebook and Snap got into an extended back-and-forth of disclosing how many billions of videos its users were consuming on a daily basis. Last year, Snap confirmed that its videos got 10 billion views a day. That came a few months after Facebook announced 8 billion video views a day. But the two firms have different metrics on what constitutes a view—Facebook is 3 seconds or more while Snapchat is any video that comes into view, no matter how long. Late last year, when Snap tweaked the app to discontinue the “auto advance” feature (which automatically plays photo and video “stories” from the accounts that each Snapchat user follows), the number of video views likely took a hit. Indeed, the most useful number to look at is if Snap is still around that 10 billion mark, showing that people are still highly engaged and tapping through videos. The more they consume, the more likely they’ll come across an ad.

MATTERS: International Growth. Almost two-thirds of Snap’s users are overseas. The company has made a big push to break into markets like Western Europe and Australia and have started to sell ads in those regions. That will be an increasingly important area for the company as it tries to diversify its revenue stream, especially as U.S. growth slows. Look to see if Snap discloses which markets are showing strength. If it’s areas like Canada, the U.K., France and northern Europe, then it can probably monetize that audience well. If it’s in Asian countries, which has been difficult for Facebook to monetize, it may be a tougher slog.

MATTERS: Infrastructure Costs Per User. Because Snap is a data-heavy company, it pays a large server bill to Google Cloud Platform every year. The company’s Cost of Revenue line item will give a clear picture as to how much the company has to spend in order to serve each user. When Facebook went public, it was spending around $1 per user on infrastructure costs. Most recently, that figure was around $2 or $3 per user. If Snap is already around that level, it could remain a significant cost center that bedevils attempts to break into profitability.

—Cory Weinberg contributed to this report.

Tom Dotan joined the Information in 2014 covering the media, advertising and streaming video businesses. He is based in San Francisco and can be found on Twitter at @cityofthetown.
Amir Efrati is executive editor at The Information, which he helped to launch in 2013. Previously he spent nine years as a reporter at the Wall Street Journal, reporting on white-collar crime and later about technology. He can be reached at [email protected] and is on Twitter @amir