Comment by JumpCrisscross | Hacker News Reader

Comment by JumpCrisscross | Hacker News Reader

Before Snap's IPO, I declined when asked to make predictions. But I did say what I thought would be the best for venture-backed companies in the long run. It is a small pop on IPO day followed by a months-long drag down to a reasonable valuation.

The small pop would signal healthy IPO conditions. The slow run down would show investors aren't in full-throttle bubble mode. We got the pop, plus some, as well as the the drag down, albeit sooner and faster than expected. If SNAP continues to between here and the offering price we can still chalk this up as a win for SV.

(Keep in mind, Facebook--whose revenues grew 54.2% from FYE 2015 to FYE 2016--trades at 14.4x FYE 2016 revenues. That implies a $5.82bn valuation for Snap. It's trading at a $30.4bn valuation, or 5x higher.)

[1] https://www.google.com/finance?q=NASDAQ%3AFB&fstype=ii&ei=4-...

Disclaimer: this is not investment advice. Please don't be a numpty and buy or sell securities based on Internet comments.

Not really a fair direct comparison to FB. Snap's revenues grew 600% from 2015 to 2016 (versus FB's 54% growth), you have to account for growth rate as well. Snap is estimated to be at $2B in 2018 (by Goldman)[1]. So yes, still overvalued, but not nearly as bad as an implied $5B valuation.

[1]http://www.businessinsider.com/goldman-sachs-is-predicting-s...

They also increased their losses from 2015 to 2016, and their growth is slowing substantially as Instagram is competing more aggressively with them.

> Not really a fair direct comparison to FB

Fair enough. The standard growth adjustment to the P/E ratio is the price/earnings to growth (PEG) ratio. Let's consider a price/revenue to growth (PRG) ratio for Facebook and Snap.

Facebook's $398bn valuation [1] sits on $27.6bn of 2016 revenues, up 54.2% from 2015 [2]. This represents a PRG of 0.266. Snap's $30.4bn valuation [3] rests on $404 million of 2016 revenues, up 690% from 2015 [4]. Thus, a PRG of 0.109.

Snap needs to grow revenues by at least 290% a year every year for the foreseeable future to reach Facebook's price/revenue levels. Put another way, Snap has a year and a half [5] to hit $2bn in revenues. (At that point, its price-today-to-revenues-tomorrow profile will be similar to Facebook's price-today-to-revenues-today.)

[1] https://www.google.com/finance?q=NASDAQ%3AFB&ei=z_C9WLngO4W8...

[2] https://www.google.com/finance?q=NASDAQ%3AFB&fstype=ii&ei=JP...}

[3] https://www.google.com/finance?q=NYSE%3ASNAP&sq=snap&sp=2&ei...

[4] https://www.google.com/finance?q=NYSE%3ASNAP&fstype=ii&ei=1v...

[5] log 1.29 ((27.64 / 398.3) * 30.44) / 0.4045)

Disclaimer: this is not investment advice. Please don't be a numpty and buy or sell securities based on Internet comments.

> Snap needs to grow revenues by at least 290% a year every year for the foreseeable future

No they don't, you're exaggerating substantially.

They'll hit near $1 billion in sales for fiscal 2017.

FB's price to sales number as you noted is 14.

For Snapchat to hit that level, they need around $2 billion in sales as of today (that'll soon be even lower I suspect).

They'll need one year of 100% growth after this year. They could easily get near or hit the 14 sales multiple by the end of 2018 in other words, without needing a single year of 290% growth in either 2017 or 2018. Your speculation missed by a mile.

They did $404 million for 2016. 290% growth on that would get them near $1.56 billion. In just five to six quarters of your growth projection, they'd have caught up to the Facebook sales multiple.

Or be conservative about it. They need:

100% growth for 2017 = ~$800m in sales for the year

70% growth for 2018 = ~$1.35b in sales for the year. They'd have a 21 sales multiple there (50% higher multiple, with near 50% faster growth).

50% growth for 2019 = ~$2 billion in sales, which gives them the 14 price to sales multiple on today's market valuation. Based on what kind of sales growth rates have been achieved by the likes of Twitter, these growth numbers are reasonable.

Not even remotely close to requiring 290% per year growth for years into the foreseeable future.

> In just five to six quarters of your growth projection, they'd have caught up to the Facebook sales multiple.

>> Put another way, Snap has a year and a half to hit $2bn in revenues

"Five to six quarters" is the same as a year and a half.

> 50% growth for 2019 = ~$2 billion in sales, which gives them the 14 price to sales multiple on today's market valuation

In 2019. We are comparing Snap's price-to-revenue ratio, adjusted for expected growth, with Facebook's. If you increase the time Snap has to reach a price-to-revenue threshold then you've reduced its growth. That, in turn, requires a higher price-to-revenue ratio to make the growth-adjusted PRG comparable.

Going from $404 million to $2.06 billion in 3 years (instead of 2 or 1.5) means a 70.4% growth rate (instead of 122% or 190%) [1]. That produces PRG ratios of 1.07, 0.627 and 0.399, respectively. Higher than Facebook's 0.266.

[1] http://www.investopedia.com/terms/c/cagr.asp

> "Five to six quarters" is the same as a year and a half.

You said they need 290% growth for years into the foreseeable future. You were wildly exaggerating. They never once need to hit near 290% style growth rates in the next three fiscal years (including 2017).

You seem to be intentionally ignoring that they don't need 290% type growth to reach FB's sales multiple rapidly.

100% -> 70% -> 50% growth is perfectly reasonable based on historical comparisons and what Snap has already managed.

By the end of 2018, their 21 sales multiple would justify the contrast with Facebook's 14 type level, based on the much higher growth rate.

Or, let's be even more realistic about it. Their stock declines from here as most are expecting. They have a $22 billion market cap instead. Their sales hit $1 billion for 2017, and then $1.7 billion for 2018. Their multiple at that point (13) is below the Facebook 14 number. That's a mere seven quarters or less away now, performing at a growth rate that is likely to be hit or nearly so. That's assuming they don't outperform on ad sales and deliver even higher growth.

> You seem to be intentionally ignoring that they don't need 290% type growth to reach FB's sales multiple rapidly

They need at least 290% growth to reach parity with Facebook on a PRG basis. This is a mathematical fact arising from their and Facebook's numbers and the definition of the PRG ratio.

There are four components to the PEG ratio: price (P), earnings and earnings growth rate [1]. For the PRG ratio, we amend this to price, revenues (R) and revenue growth rate (G), i.e. P / (R * G * 100). We can further expand G to revenues today (R0), revenues tomorrow (R') and the years between today and tomorrow (y) using the definition of compound annual growth rate [2]. We can thus derive a fuller expression of the PRG ratio [3].

Using Facebook's FYE 2015 numbers for R0 and FYE 2016 numbers for R', where R' = R since we're using a historical R', we find a PRG ratio of 0.266 [4]. We now seek to find under what conditions Snap can make a 0.266 PRG given its current valuation. R0 = R = $404 million (FYE 2016 revenues) since we're forecasting R'. P is set by the market.

All we have to play with are R' and y related by (R' / 404 million) ^ (1 / y) = 3.833. Solving for y given R'=$2.06bn yields 1.19 years. Going from $404 million to $2.06bn in 1.19 years means a 283% growth rate.

The math is unyielding. In one year, Snap needs $1.5bn (in 2 and 3 years $5.9bn and $23bn, respectively) to hold, at a minimum, parity with Facebook based on this metric. If they don't, their PRG ratio goes up or their valuation goes down. This is a fact based on definition, not an opinion.

Valuing unprofitable high-growth companies is hard. Your quibble may be with the metric. When Snap becomes profitable it will lend itself to the far more tolerant P/E and PEG ratios. Until then, they need to grow or devalue.

[1] http://www.investopedia.com/terms/p/pegratio.asp

[2] http://www.investopedia.com/terms/c/cagr.asp

[3] PRG Ratio = P / [100 * R * ((R' / R0) ^ (1 / y) - 1)]

[4] https://news.ycombinator.com/item?id=13807118

Agree. There will never exist a direct comparison, given this current market is about one company owning a particular niche in the overall online services market. There are no close 2nd placers when it comes to a particular model and offering.

Well, there has to be a little offset to compensate for the size. It's easier to grow a smaller business at high rates than it is at Facebook scale.

> we can still chalk this up as a win for SV.

But a loss for the investors that bought the stock on the open market. So even if you think that's a good thing it will definitely reduce the chance of seeing another pop with the next IPO.

A 'drag down' is never a good thing for a stock.

Isn't the original commentator arguing that its good for the ecosystem as a whole, not necessarily good for SNAP?

And I'm arguing that it is not good for the ecosystem as a whole.

> it will definitely reduce the chance of seeing another pop with the next IPO

"Pop" is a function of the gap between what the underwriters pay the company (the offering price), what the underwriters offer the market (the opening price) and what the market offers itself (the first-day closing price).

Lower first-day closing expectations thus mean less "pop", less profit for the bankers and/or a lower offering price for the company. If you believe, as I do, that valuations are touching on frothy, none of those is a bad thing.

Keep in mind that Snap was happy to go public at 14 to 16 a share [1]. Bankers priced at 17, it opened at 24 and then we got this mess.

> A 'drag down' is never a good thing for a stock

It can be healthy for the market if it encourages sustainable practices. That's my point--it's good in the long run.

[1] http://www.usatoday.com/story/tech/news/2017/02/16/snap-pric...

The point of his post is "it's good for Snapchat in the long run - it indicates a healthy company."

So, it's very good for investors who invested in the company, i.e. the sorts of people that won't be selling the stock within 2 days of buying it. They'll hold on, and presumably make money in the long run as the values drag down.... and back up beyond the ipo value.

This company isn't offering voting rights nor planning dividends. What's the benefit of owning shares, other than trying to choose the right moment to sell them to other speculators?

The benefit is that you might receive dividends later on, after a period of revenue growth.

Granted, it'll be years if not decades before SNAP pays a dividend, if it succeeds at all. But on the flip side, SNAP's future dividends could turn out to be worth much more than the current price, even after discounting for risk and the opportunity cost of your capital.

> But a loss for the investors that bought the stock on the open market.

It's a loss for speculators who gambled that it would go up. I'm lacking sympathy for people who snap up stock at IPO and assume it can't possibly drop.

> A 'drag down' is never a good thing for a stock.

It's a great thing for anyone who wants to buy at the lower price.

It's only a loss if they sell...

I would think less of a pop in future IPOs is also a good thing. It means that the markets are valuing shares in tech companies in a measured and reasonable way to begin with, which results in less market volatility, which in turn results in fewer of the kind of financial plot-twists that burn companies down and toss engineers out on the street.

Its only a bad thing if you're trying to short-term game the market with simplistic strategies. And if you're doing that you have worse problems.

> we can still chalk this up as a win for SV

Snap is not located in Silicon Valley, if that's what you meant by "SV".

Sillicon Valley is not just a place. Hollywood is not located in Hollywood, Wall Street is not located on Wall Street...

This concept has the cool name called "metonym".

I didn't decline when asked. I said "sell".

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