Snapchat Is Justifying Its $20 Billion Valuation by Emphasizing User Engagement

  • Bankers given engagement metrics to calculate market valuation
  • Company said to tout more than 150 million daily active users

Snap Hopes to Convince Investors It's Worth $20 Billion

Snap Inc. is hoping to convince public market investors it’s worth upwards of $20 billion by stressing how important its app is to users’ daily lives.

That’s what Snap’s management highlighted this month to analysts from banks underwriting its initial public offering, according to people familiar with the matter. The company laid out a slew of engagement metrics that will be used to build financial models to determine the valuation it will seek, they said, asking not to be identified as the details aren’t public.

The company gave out numbers on daily active users, which currently sit at just more than 150 million. Management talked about the number of snaps -- annotated photos and short videos -- its users take daily, and how long they spend on the app.

They detailed what percentage of users take photos using the app’s camera, as well as how many of those images use geofilters -- colorful place names which users can place on top of their snaps -- or are being saved with the new Memories feature. Snap also divulged the percentage of users sending messages through the chat feature.

Convincing investors of the value of its engaged users will be critically important. As management told the analysts, Snap is still an early stage business where short-term performance may be “lumpy” as it grows.

Engagement matters because Snap intends to focus on more technologically mature markets where it will look for ways to increase its average revenue per user, the people said. That’s a departure from social-media competitors. At Twitter Inc. monthly active-user growth has been a key metric and daily active users aren’t disclosed. At Facebook Inc., the company’s goal is to connect everyone in the world on the site, using a strategy that puts a lot of emphasis on emerging markets.

A representative for Snap declined to comment.

Valuation Yardstick

Selecting these metrics is a key part of the IPO process, as Wall Street investors seek clarity on how to value the business from Day 1. They’re the yardstick that analysts and investors will use to gauge the company’s success.

Listing day could come as soon as the first quarter, with Snap aiming to raise as much as $4 billion in the IPO, people familiar with the matter have said. Success will come in the form of reaching the $20 billion to $25 billion in value that the company is targeting, the people have said.

Despite being known for its culture of secrecy, divulging these metrics is a sign of Snap being more open than its social-media peers, Twitter and Facebook, have traditionally been.

Still, its insistence on confidentiality has already caused tension in the lead up to the IPO. While these numbers were given to its underwriters, it’s unclear whether prospective investors will see them before the listing, or whether Snap plans to update them quarterly when it becomes a public company.

Snap can learn an important lesson from the ghosts of social-media IPOs past about how important it is to disclose correct metrics from the get-go. Twitter, which filed to go public in 2013, pulled an about-face on which metrics it uses to measure success just months later. The misstep has plagued the company ever since.

Twitter Lessons

Leading up to Twitter’s IPO, it touted monthly active-user growth and timeline views as the numbers to watch. Three months after it filed its initial deal prospectus highlighting the metric, Twitter told investors to ignore timeline views because they weren’t so important. Soon after, company insiders began downplaying monthly active users at the same time that number started decelerating. Instead, the reach and impact of tweets, as well as the value of embedded advertisements, became the chief numbers.

Just six months after the IPO, former CEO Dick Costolo said Twitter had work to do in explaining how to evaluate its reach. Questioning how to value the stock, investors punished shares for the uncertainty. The company’s market value plunged by more than half from its post-IPO high.

Snap is seeking to distance itself from the Twitter debacle. The company will try to temper short-term inconsistencies in performance by focusing on the long-term investment thesis.

Management wants investors to think of the company akin to Amazon.com Inc., people familiar with the matter said: Financial performance in a given quarter may be uneven, but the technology giant spends what’s necessary to own whichever market it touches.

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