Comment by JumpCrisscross | Hacker News Reader

Comment by JumpCrisscross | Hacker News Reader

Parent Full thread

> 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

Reply on news.ycombinator.com