Snapchat IPO Valuations Slashed: Does That Make Snap Stock Attractive?

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Without a doubt, the upcoming Snapchat IPO is one of the most awaited tech IPOs in recent times. Pitted to be the biggest tech IPO since the Alibaba IPO in 2014, the Snap Inc IPO has attracted a lot of attention from investors and analysts alike. While Snap Inc, which owns Snapchat, was initially expected to go public at a valuation of $25 billion, the company has reportedly slashed its ambitious target. As per recent reports, Snap Inc is now looking to go public at valuations ranging from $19 billion to $22 billion, with a share price in the range of $14 to $16 a piece. Does the slashed valuation make Snap stock attractive?

Slashing Snapchat IPO valuations a smart move.

According to recent reports, Snap Inc will now look to go public at a valuation of $19 billion to $22 billion, as it goes public under the ticker symbol SNAP on the New York Stock Exchange. Snap Inc's move to slash its previous seemingly overambitious target of $25 billion comes across as a very good move. Well, there's no denying the fact that the upcoming Snapchat IPO has generated a lot of investor interest - to the extent that some "overeager" investors even went ahead and bought shares of a similar sounding company, Snap Interactive (OTC:STVI), sending its shares 140% higher. And Snap Interactive's relatively paltry $50 million market cap may have something to do with it. Be that as it may, Snapchat's reported initial valuation target of $25 billion was way too ambitious, and there's no lack of consensus on that front. However, even the scaled down $19 billion target may not be attractive enough.

What you get if you buy into the Snapchat IPO.

For starters, a $19 billion valuation implies a price to sales multiple of 47. Look at some of the more successful IPOs in the past, like the Alibaba (NYSE:BABA) IPO, and it's easy to see a pattern. Alibaba was valued at about ~20 times trailing twelve month sales, while Facebook was valued at a P/S multiple of 28. Twitter's IPO valuation of ~45 times sales comes closest to that of Snapchat's, and we're all pretty familiar with how Twitter's story unfolded after the initial euphoria. To put things into perspective, Snapchat is expected to generate $1 billion in revenue in 2017. And even Snap Inc's 1 year forward P/S ratio of 19 to 22, is expensive, even by tech unicorn standards. Especially for a company that has massive-and-mounting losses to contend with. For 2016, Snap Inc recorded a net loss of $514 million, much higher than its revenue of $404 million for the year.

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Disclosure: Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a ...

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