Snap Inc. – Just In Case

It’s high-noon for Snap and their bankers at the NYSE trading post. The consensus in the capital markets is that the deal will get down and open above the IPO price. Institutions consider Snap an IPO to own “just in case” it works.

Individual Investor Sentiment

Most investors now realize that the historical Snap business is betting eaten by Facebook. But Snap knows that too. There’s some hope that new Snap content will be what saves the day and provide another leg of growth. Snap management claims that their innovation and culture are what will enable them to “do it again” and keep Facebook at bay.We’ve covered more about Snap in our prior posts:

1. Snap IPO Part 2 - “More like YouTube 2.0”
2. Snap IPO Part 1 - “First Take on the S-1”

As a wrap up let’s have a quick look at a potential price target based on a quick IV model. We've noted that a conventional approach to valuation doesn't work with SNAP. We outlined some valuation approaches in Part 2 of our Snap coverage but investors have also noted that while Snap is much earlier-stage than Facebook at the time of their IPO you can still do some math on revenue potential.

A simple "back of the envelope" calculation is to normalize Snap revenue relative to FB at the time of the IPO. So assuming the same monetization rate per DAU Snap revenues would have revenues of $1.2B instead of $404M. That would bring the P/S ratio down to 14x which is still high but not nosebleed high. It's also about equal to the current P/S ratio for FB.

To make an IV model work for the stock at $15 one must use a very high rate of long-term revenue growth (80%) and a 50x earnings multiple. It's not out of the question and gets to a $4B revenue level in 4 years.

Institutional sponsorship is a bit weak for a deal of this size but it's there and enough to get the deal done. As shown in our first graphic independent investors are feeling similar with 58% being bullish (Source: StockTwits, n=7,125).

The deal is supposed to price tonight and there is some talk of increasing the range $1 or $2 but this late in the game it's not a great sign of strength.