Goodwater Capital, the new consumer technology venture firm, has released what is seen as the first deep dive of Snapchat’s business, saying that while a valuation of $25 billion may not seem like a stretch for Snapchat in an IPO, it is facing competitive headwinds from the likes of Facebook, Instagram and others.
In the report, Goodwater Capital said Snapchat’s first mover advantage in video and short-lived disappearing images along with its engaging products has positioned it as the best competitor to Facebook. What’s more, Goodwater Capital said a “strong management team, impressive user growth and engaging products enable Snapchat to accelerate top-line growth and gain market share in the $70 billion spent on U.S. television ads annually.”
Still while Snapchat could warrant a $25 billion valuation in an IPO, the company is seeing its user base decline and is facing increased competition, which sets the stage for what Goodwater Capital said is an “interesting investment discussion of the opportunities and risks given the IPO’s valuation and future financial expectations.”
On the risky side, Goodwater Capital said Snapchat’s daily average user growth has fallen significantly during the last two quarters, reporting only 3.3 percent quarter-over-quarter growth in the December quarter. Goodwater also found Facebook and Twitter have better growth at the time of their IPOs.
“This IPO is necessary to fund the company’s near-term cash burn and contract commitments to Google Cloud ($2 billion), Amazon Web Services ($1 billion) and others ($547 million) over five years,” wrote Goodwater.
Earlier this month Snapchat disclosed in a Securities and Exchange Commission (SEC) sion filing that it was going public, it valued itself at around $21 billion as of December 2016 and its shares were worth $16.33 at that time. The company noted that it would like to raise $3 billion in its IPO, but may in fact seek to raise as much as $4 billion, The New York Times reported. Snapchat will list on the NYSE under the ticker symbol SNAP.
According to the SEC S1 filing, Snapchat’s sales totaled $404.5 million in 2016, with a net loss of $514.6 million. With an average of 158 million people using Snapchat daily and more 2.5 billion Snapchats being created each day, Snapchat used its filing to make a strong case for how it can build on its revenue growth and continue to keep users engaged.