Snap Inc., Snapchat's parent company, has recently made a regulatory filing for an IPO listing on the NYSE scheduled for March with ticker code: (NYSE:SNAP). Snapchat (“Snap”) is looking to raise $3bn in funding for the company in its SEC filing with a $20-25 billion valuation. 

In terms of its business activity, as at end of 2016, Snap has 158 million daily, active users creating circa 2.5 billion daily “snaps” on its platform.

Growth Potential:

Timing-wise, Snap has been cherry picked now as ripe for flotation due to it reporting a phenomenal sales growth rate with revenues increasing 600% in 2016 to $404.5 million from less than $59 million in 2015.

This is an explosive growth rate when compared to its comparative peer, Facebook, which grew sales by 54% in 2016, but this does not take into account that Facebook sheer size dwarfs Snap’s revenues by reporting $27.6 billion last year.

Snap’s structure and set-up when put under scrutiny raises concerns:

Corporate Governance structure: Snap’s 26-year-old CEO Evan Spiegel will have near absolute control through proposed asymmetrical voting rights which is expected to alienate potential investors.

Snap is exposed and heavily reliant on its platform functioning by working off other providers systems including Google Drive, etc. This creates an additional risk factor in its supply chain that could affect its ability to function properly without disruption, etc as opposed to Facebook managing its platforms supply chain in-house.

Valuation Issues:

Snap has an eye-watering, proposed price valuation of 62 times of its sales (P/S ratio, "PSR"). As an industry peer, Facebook (NASDAQ:FB), which owns Snaps direct competitor Instagram, has a current PSR of just 14.1x (vs PSR 23.7x at IPO in 2012).

Other Sector Benchmark's are even lower on current PSR valuations, namely: Yelp (NYSE:YELP) at 3.9x (vs PSR 17x at IPO in 2012), Google (parent co: Alphabet NASDAQ:GOOGL) at 6.6x (vs PSR 8.5x at IPO in 2004) and Twitter (NYSE:TWTR): at 4.6x (vs PSR 22x at IPO in 2013).

From an alternative perspective, if we compare Snap's valuation as a "Camera company", would make GoPro (NASDAQ:GPRO), an appropriate measure to Snap, and trades on a PSR of just 1.1x (vs PSR 5x at IPO in 2014).

High Valuation Justification?

Snap’s valuation can only justify such a high price tag based on its future growth scope. Its revenue has increased rapidly, but the growth in the…

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