I loved this piece, but perhaps not for the reason Roy wrote it.
One of the common themes in investing is "what am I missing?" and this piece is a great walk through through a reasoned set of parameters that might make a company or project more or less valuable. The assertion that SnapChat is 'Intrinsicially' worthless is of course false. For something to actually be "worthless" in a free market would require that either no one would offer any value in exchange for partial ownership, or there would have to be outright fraud. We say a 'fake' Van Gough is worthless because it is worth much less than an original, but someone might buy it because they like the painting and they can't afford an original. As a painting it would probably be worth more than a print. But not actually "worthless."
So what is he saying? He says that Snapchat's recent valuation was much higher than he would have put it. And we can ascertain that like the forgery vs. actual painting the difference in the two numbers is large.
So what is the basis for this disconnect? It is this:
" $4bn for an easily replaceable service that is little more than Microsoft Paint duct taped to a disposable camera? A service that voluntarily throws away its own data in the golden age of data hoarding? A service devoid of the nature of competition that is the driving behind every other profitable company in the world?"
The focus here is on the tech and not the market. A pet rock was 'worthless' (the rock was just a rock) but the connection with a generation was valuable. So often in our business we look at something that we feel like we could build (or could be easily built) and a valuation, and focus on those two things. The parts we don't see we give little value to (350M snaps? Seriously? That is a boat load of engagement). Making anything that get 350M 13-23 yr olds engaged is a pretty huge deal. That is what is valuable with Snapchat, not the tech.
Agreed. This is why Snapchat is attractive, and the model of "get users and content now, monetize later" has worked in the past. So this is simply a scaled-up challenge. I'm curious to see how Snapchat makes its money.
Here's some of my ideas and they all involve in-app purchases:
* Corporate deals that allow you to place products in your snaps, kinda like Photoshop. Example: you pay $0.99 to be able to place a character from South Park in your Snap.
* High-quality snaps, that take advantage of your camera's full resolution
* Sound snaps, so you can record 30 seconds of audio and send it to a friend. Great for sharing tracks you make or music you're hearing, or just to record some idiot yelling on the bus.
There are many more possibilities. Snapchat can almost be thought of as a "social game", a sort-of cross between FarmVille, Instagram and Twitter. You can still share basic things to your friends, but you can pay to send even better things. My ideas may or may not be shitty, but they still prove that the service probably can monetize, in my opinion.
We need to get away from the idea of intrinsic worth. There are somethings that are worth a lot that you wouldn't pay money for, such as honesty. Converse applies too.
Furthermore, even money itself has no intrinsic worth. The old Indian adage of "when all the trees are gone, ... try to eat money" reminds us of the mania of collecting things that have little value on its own.
What does this mean in the context of Snapchat? Firstly, snapchat trades in the attention of a particular demographic. The market has shown that it is willing to pay for the attention of this group - witness how much advertisers spend on tv. However, the younger set are watching less TV than their predecessors. Ergo, the advertising spend will have to follow where the youth are. When young people were in cars, billboards were real estate. Bill boards themselves have no intrinsic value, but it didn't stop people from making money (Ted Turner's dad ran a billboard business).
The real question is whether Snapchat will endure past a couple of seasons in its present format. There was a time when Twitter was cool, but now it has repositioned itself as a real time news feed. I think Snapchat has creates real value. Kids get the validation they crave for in a social network, but not have to worry about a permanent record of their activities being archived somewhere. Even if this is not worth money to kids, it generated value to a concerned parent.
Thanks for the comment ChuckMcM, I'm glad you enjoyed the article.
I tried to stay away from poking fun at the simplicity of the technical aspects of the service as much as possible, and I didn't mean for the article to come across as tech-focused.
All I meant with the MS Paint/duct tape comment was that it wouldn't be hard for a competitor to recreate the service - in fact Facebook Poke has already tried and failed due to your observation that it takes a certain "connection with a generation" to make a seemingly silly product successful. That, and Snapchat was the first to move to the market, giving it a huge inertial advantage over Poke.
The main point I wanted to make was most definitely market focused: Snapchat has built itself a user base in a market that it can't monetize by itself. It can continue to gather users 'til the end of time, but it will never be able to get any revenue from them without altering its service and driving users away. Therefore Snapchat is intrinsically worthless.
This is distinct from the statement that "Snapchat is worthless" - clearly it isn't extrinsically worthless because it can be used as a funnel to get users to other parts of the internet that might generate revenue. So there is some basis for valuing the company.
The question then becomes how much is it actually worth? I'd love for someone to help me out and stake a valuation for what they think Snapchat is actually worth.
Less than $4bn is my estimate. How much less? Not so sure.
"The question then becomes how much is it actually worth?"
The correct answer is 'what someone will pay for it.' But I recognize that answer is unsatisfactory. Correct me if I am wrong, but I believe you are asking "What line of reasoning about Snapchat results in the highest valuation?" Or to put it differently, how does someone convince themselves that Snapchat could be worth billions rather than a few million at most.
4.) At an estimate of 305MM 'snaps' per day, assuming multiple snaps per user. We can estimate that Snapchat has something north of 70% of the high income youth smart phones captured.
What is that worth? Can you entice them buy 1 thing? What is the biggest expense of any transient product? Customer acquisition. What would you pay to say something to nearly every customer in your market?
My guess is that if your in a product space that depends on consumers in this demographic, then being able to talk to them through SnapChat would be as valuable as a SuperBowl advertisement to you. And if you are an investor, owning a piece of that channel might appear to be a very good bet.
Here was my "valuation model" when they raised at 800M:
5 Years From When they raised :
100M Users X $4 worth of advertising per user X 50% margin = $200M Cash Flow X 20 Times earnings = $4BN - solving for a 50% IRR over 5 years gives you $800M
But that is presupposing that a) data is undeniably king as a competitive edge, (it might be, but we don't know this for sure, we might be in for a surprise), and b) that Snapchat is simply unable to make any significant change in its operations.
The Snapchat team is ostensibly pretty talented, and apparently on fire right now, so who knows, they might start something new on the side and link it to Snapchat which may really take off.
One of the common themes in investing is "what am I missing?" and this piece is a great walk through through a reasoned set of parameters that might make a company or project more or less valuable. The assertion that SnapChat is 'Intrinsicially' worthless is of course false. For something to actually be "worthless" in a free market would require that either no one would offer any value in exchange for partial ownership, or there would have to be outright fraud. We say a 'fake' Van Gough is worthless because it is worth much less than an original, but someone might buy it because they like the painting and they can't afford an original. As a painting it would probably be worth more than a print. But not actually "worthless."
So what is he saying? He says that Snapchat's recent valuation was much higher than he would have put it. And we can ascertain that like the forgery vs. actual painting the difference in the two numbers is large.
So what is the basis for this disconnect? It is this:
" $4bn for an easily replaceable service that is little more than Microsoft Paint duct taped to a disposable camera? A service that voluntarily throws away its own data in the golden age of data hoarding? A service devoid of the nature of competition that is the driving behind every other profitable company in the world?"
The focus here is on the tech and not the market. A pet rock was 'worthless' (the rock was just a rock) but the connection with a generation was valuable. So often in our business we look at something that we feel like we could build (or could be easily built) and a valuation, and focus on those two things. The parts we don't see we give little value to (350M snaps? Seriously? That is a boat load of engagement). Making anything that get 350M 13-23 yr olds engaged is a pretty huge deal. That is what is valuable with Snapchat, not the tech.