Snap Inc. shares priced this week at $17 each, above the projected range and valuing the company at nearly $24bn. Snap will be raising $3.4bn in its IPO. To put that in context, as we only seem to do at Spaceship, the company was valued at $70m — only 4 years ago.
Most don’t know, but the average hold period of stocks — the length of time an investor owns a small ownership stake in a public company — has been plummeting for decades.
Based on the NYSE index data, the mean duration of holding period by US investors was around 7 years in 1940. This stayed broadly the same for the next few decades. Then, the average holding period began a consistent decline to below one year by the turn of the century. Unbelievably, it is now around 7 months, based on the latest released data.
A similar pattern exists in the UK (see chart above). There the average duration has fallen from around 5 years in the mid-1960s to less than 7.5 months in 2007.
This is why we had to laugh at the office this week when CNBC thought it was newsworthy to report that new investors in Snap’s IPO are considering holding onto their shares for 12 months. Let’s hear an applause for long-term investing.
Importantly, an investor holding stock in a company for less than 12 months will have the majority of their return (or loss) determined by a movement in trading multiples rather than the growth in the underlying economic engine of a business (more here from us on this).
Snapping back to Snap, we have written multiples times on the Snap’s IPO.
Our view is that Snap is differentiated by being the social network of your real friends. Said another way, Facebook is for keeping tabs on people you used to know, Twitter is for following people you want to know, and Snap is for people you really know.
Facebook is for keeping tabs on people you used to know, Twitter is for following people you want to know, and Snap is for people you really know.
Long-term investors are looking for businesses that are highly differentiated (to earn high profits on invested equity) and highly defensible (competition is attracted to high profits — so, you know..). Social networks and marketplaces are the most defensible form of business model for technology companies.
Unfortunately, when most investors talk about the prospect of investing in Snap, they focus on platitudinous detail. Here is an exampleinvestment thesis from a venture capitalist — who is investing in Snap for three reasons: the people, the market and the vision. Hmm…
If you can get your head around Snap’s differentiation and hopefullydefensibility over time, a long-term investor looks to a sensible valuation.
At $24bn, Snap is going to trade for a snapping >50 times 2016 revenue. To give context, underperforming Twitter generated $2.5bn of revenue in 2016 and trades at an enterprise value (EV) of $9bn (accounting for cash on balance sheet) giving a historic revenue multiple of only 3.5x. While, Facebook trades at 13.2x historic revenue (it generated $27.6bn in 2016 and has an EV of $394.6bn). These numbers make Snap feel pretty expensive right!
Be careful to make sure numbers are unbundled. Snap is very early on its monetisation of its user base. That is, generating advertising dollars per active user. Snap currently monetises active users at ~$2.53 per year. Twitter does ~$7–8 per active user per year. Facebook does ~$15 per active user per year.
But a good investment analyst will notice that most of Snap’s user base is in developed markets like the US and Europe. In US & Canadian market alone, Facebook generates >$60 per active user per year!
Snap will not get to that level anytime soon. But it points to the look-through revenue potential of Snap’s existing (not including future) user base being in the billions.
Going forward, we at Spaceship, hope the markets concentrate on the growth in Snap’s active audience and Snap’s ability to monetise that audience.
Originally published at https://www.spaceship.com.au/blog/2017/snap-not-short-term.