BLOOMBERG
INTELLIGENCE
A
SPECIAL
REPORT
Snap Inc.'s IPO
Snap Millennial Power Needs
Execution to Top Facebook
Sales growth at Snap over the next few years may
rival Facebook's early days, yet questions loom about
its ability to replicate the internet giant's user base
and margin. Snap intends to go public this year.
Snap's difference is its very
engaged young users and an
aggressive push into contentcreation hardware for gadget and
social media-savvy millennials.
Snap's product strategy shows it
gets millennials like no other.
Focusing on this strength can make
it a formidable content platform,
but deviation could mean
unmanageable competition from
Facebook.
Bloomberg Intelligence analysis
shows perfect execution can yield
over 50% annualized sales growth
through 2020. Users aged 11 to 34
make up 85% of Snapchat's
audience. It had 158 million daily
users in 4Q vs. Instagram's 400
million. Snap's diluted IPO valuation
may be $19.4-$22.2 billion.
Snap Margins May Sit Below Peers
Snap's cost-of-sales composition
may mean its negative gross margin
could take time to reach industry
levels. Gross margin was negative in
2016 vs. more than 40% among its
peers. Cloud hosting, content and
revenue sharing make up most of
cost of sales.
Copyright 2017, Bloomberg Intelligence
By Jitendra Waral
BI Senior Industry Analyst
Contributing Analysts:
Paul T. Sweeney (Media)
Matt Larson (Litigation)
Gregory Elders (ESG)
Sean Handrahan (BI Associate)
Snap Revenue by Geography ($ Millions)
Source: Company Filings
Revenue Set to Rocket on Mobile Ads, Spectacles
S
nap's robust growth in
Snapchat global ad sales may
average revenue per user
surge 231% to $936 billion, eMarketer
should keep propelling its top-line as says, which translates to 1% of exit's only just begun monetizing its 158 China mobile ad spending.
million daily users.
North America, including Mexico
Snap's revenue grew sevenfold in and the Caribbean, made up 89% of
2016 to $404.5 million, yet ARPU was Snapchat's 2016 revenue, Europe
less than a 10th of Facebook.
8.8% and the rest of the world 1.9%.
Key catalysts for 2017 include new
Snap's Spectacles product could
tools for automated buying, ad
generate $200 million in 2017 sales,
budgets moving away from Twitter
based on Bloomberg Intelligence
and Yahoo and Spectacles unit ramp. analysis.
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BLOOMBERG INTELLIGENCE
User Expansion
Momentum
Requires Geographic
Diversification
Snapchat Users, Demographic Penetration Rate
Snapchat must expand into
international markets to maintain its
user-growth momentum as it's
reaching high penetration rates among
U.S. millennials.
About 70% of U.S. smartphone
users aged 18 to 24 are users of the
ComScore
service and almost 40% of those aged Source:
Note: RHS Among U.S. Smartphone Users
25 to 34, according to ComScore data.
but growth flattened sequentially in
More recently, penetration has
picked up in the 35-and-older bracket. 2H.
About 88% of Instagram's users
User growth outside of North America
was higher than 50% throughout 2016, are outside the U.S. compared with
Snapchat's Addressable Base of Young Users
Source: eMarketer, ComScore, Bloomberg Intelligence Analysis
Note: Millions
Snapchat at a Billion Users? Demographics Say No
S
napchat's long-term user growth will be contingent on adoption
among younger audiences globally as it will be harder for the
company to appeal to older populations with current products.
Demographic data of smartphone users, excluding China, shows that by 2020
the addressable global population of smartphone users is likely to be 600
million for ages less than 35. This likely means cracking 1 billion users on its
platform is a very challenging goal for Snapchat. Of Snapchat users, 85% are
younger than 35.
Almost 47% of the U.S. population is below age 35 and this number is
expected to decline to 46% by 2020, according to World Bank data. About 40%
of the EU population is similar, according to Eurostat data. In India, 68.5% of
the population is age 39 or below, according to the U.S. Census Bureau.
Copyright 2017, Bloomberg Intelligence
A Special Report
66% of Snapchat users, according to
eMarketer data and company filings.
Instagram has 400 million daily
users, while Snapchat has 158 million.
Stories Feature
Spurs Engagement,
Survey Shows
A Bloomberg Intelligence poll
of U.S. Snapchat users suggests
that Stories are the feature most
heavily engaged with, while
Sponsored Lenses may be
considered the least intrusive ad
format.
Twenty-five percent of users
polled watched 10 or more Stories
a day. An engagement risk may be
revealed by a cohort of users that
might be accessing the app
primarily to consume content: 18%
of users say they never post in
their own story and 30% say they
only send text messages to
respond to a Snap or friend's story.
Methodology: Bloomberg
Intelligence used CrowdFlower to
poll self-reported Snapchat users in
the U.S. during October. The poll
contains responses to a variety of
product usage and demographic
questions from 2,046 individuals.
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BLOOMBERG INTELLIGENCE
Vurb Acquisition
Helps Snap Chase
Facebook and Yelp
on Local Ad Front
A Special Report
Location-Targeted Ads Becoming Common on Mobile
Snap's acquisition of Vurb may
help it build features into its messaging
app that would increase user
engagement and boost its share of
local ad spending.
Facebook is pursuing monetization
of its messaging service's business-toSource: BIA/Kelsey
consumer interactions, while Yelp is
encouraging similar features. Vurb is a preferences, similar to Google Now.
contextual search engine for mobile
Longer term, Snapchat may aim to
that provides information and
capture a share of location-based
suggestions based on user location and advertising by building traditional
discovery features directly into its
application. Vurb may also help
Snapchat gain information for ad
targeting when users perform searches
Snap's Revenue Outlook Counts on Scaling Its Ad Products
T
he scalability of Snap's
include Geofilters and Lenses and are
revenue likely depends
sold only by Snap.
primarily on its two core ad
The company offers an API to let
product offerings,
Snap U.S. Ad Sales Forecast
Sponsored Creative
Tools and Snap Ads.
In 2016, about 70%
of U.S. ad revenue
likely came from Snap
Ads, which are sold by
Snap or via content
partners.
The remainder
came from Sponsored
($ Millions)
Creative tools, which Source: eMarketer
Spectacles Pave Path
to Sales Growth,
Augmented Reality
Snap's hardware strategy with
its first product, Spectacles, is likely
geared to increase content and
engagement on its core Snapchat
platform. A Bloomberg Intelligence
Copyright 2017, Bloomberg Intelligence
revenue model for Snapchat
indicates the company could tap
into a revenue potential of $1 billion
annually by 2020 if 2.5% of daily
users purchase the glasses.
Longer term, the company may
continue to evolve millennialfocused hardware for consuming
and creating content, potentially
paving the way for entry into the
brands and agencies conduct
campaigns automatically.
Snapchat also offers a self-serve on
-demand Geofilter
platform that lets
individuals and local
businesses buy
geofenced local-ad
space.
Partner-sold revenue
accounted for 13% of
revenue in 2015 and
9% in 2016 and is
recognized net of
partner revenue share.
augmented-reality market.
Bloomberg Intelligence analysis
suggests that hardware demand
should support Snap sales growth
through 2020, but may result in
margins lower than peers such as
Facebook. In a Bloomberg
Intelligence poll, 12% of Snapchat
users indicated some purchase
intent of Spectacles.
Page 3
BLOOMBERG INTELLIGENCE
A Special Report
Snap Sales Growth Can Match Facebook, With Strong Execution
A scenario analysis of Snap's
revenue potential suggests the
millennial-focused platform can
exhibit sales growth that matches
that of Facebook's early days, albeit
at lower margins.
Strong execution is needed on
two fronts: Ad revenue needs to
depend more on programmatic ads
and self-serve tools for marketers;
and user engagement must be
continually high.
A poll of Snapchat users shows a
high degree of interest in its
Spectacles, which may mean
hardware can contribute to sales,
albeit at a lower margin.
Bloomberg Intelligence scenario
analysis shows Snap can achieve over
50% annualized growth through 2020
by gaining realistic ad market share in
verticals more exposed to millennials.
Spectacles Purchase Intent (Users Aware of Them)
Source: Bloomberg Intelligence Poll
Note: N=687, among respondents who said they were aware of Spectacles
Snapchat Catching Twitter's ARPU Can Top Facebook Growth
Snapchat is in the early stages of monetizing its user base, with its
average revenue per user in 2016 only 8.3% of Facebook's. Even if Snapchat
matches Twitter's ARPU by 2020, which is lower than Facebook, its sales
growth would exceed that of the social media giant's early days. From 200913, Facebook's revenue grew at a 78% compound annual rate. Snapchat's
annualized ad sales growth can exceed 80% through 2020 if it becomes easier
for marketers to programmatically place ads on the platform, based on BI
analysis. Key differences between Snapchat and Facebook would likely be
user growth and strategy, not sales growth. Snapchat's growth long term may
be slower than Facebook's as penetration peaks among younger users.
Copyright 2017, Bloomberg Intelligence
Snap's ad revenue growth this year
may get a boost from a weakening
grip on market share for Twitter and
Yahoo.
$130 Spectacles
May Add $200 Million
in 2017 Sales
Snapchat's entry into camera
hardware with its Spectacles may be
crucial for its 2017 IPO, as it can
swing revenue expectations. A
Bloomberg Intelligence poll of 2,046
U.S. Snapchat users showed that
among those aware of the $130
glasses, 8% said they'd definitely buy
them. Even if half of those do, this
translates to U.S. revenue potential of
$200 million, based on ComScore U.S.
monthly user data. Bloomberg
Intelligence estimates suggest
Snapchat's 2017 ad revenue may
more than double to about $1 billion.
Snap's strategy to upsell
millennial-focused hardware products
may incrementally add to revenue
while positively influencing content
growth on its platform, which
supports core ad sales. Snapchat has
more than 158 million daily active
users, 68 million of them in North
America.
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BLOOMBERG INTELLIGENCE
A Special Report
Snap's $22 Billion IPO Falls Into Line With Facebook's
Snap's $19.4-$22.2 billion
Price-to-Sales, Snapchat Revenue Forecast
valuation range for its initial public
offering could mean the messaging
service would have to reach $1.06
billion in 2017 revenue to match
Facebook's IPO multiple, using the
valuation midpoint. Snap may have
$936 million in ad sales this year,
according to eMarketer, and $200
million or more in hardware sales from
Spectacles, based on BI analysis.
Facebook's IPO carried a sales multiple Source: Company Filings, eMarketer
of 19.6x, while Twilio's recent offering
had a multiple of 18.3x.
Snapchat had 158 million average Value Per Daily User Is a 30% Discount to Facebook
daily active users in 4Q, according to
Snap's implied
Snap had a $554 million
IPO Market Cap
company filings.
market cap value per Per Daily Active User Ebitda loss in 2016.
daily active user, using
Snap's fully diluted IPO
the high end of its
valuation may range
Snap Can Mirror
valuation range, trails
from $19.4-$22.2 billion,
Google, Intel
that of Facebook at its
according to company
IPO. This may reflect the
filings. Facebook's IPO
Wearables Trick
fact
that
Snap
has
yet
to
valuation was $104
Snap's plan to use hardware
Source: Company Filings
leverage
its
rapid
sales
billion.
to foster content creation can
(Assumes Snap Valued at $22.2 Billion,
growth into operating Fully Diluted)
Snapchat had 161
benefit from the partnership
profitability.
million
daily
active
users in December.
strategy applied by Google, Intel,
Facebook
recorded
$2.91
billion
in
Facebook
had
526
million
in March
Microsoft and Facebook. Each of
adjusted Ebitda in 2012, its IPO year.
2012, prior to its IPO.
those companies are partnering
with hardware manufacturers to
Patent Trove Has Worth Beyond $9.5 Million Valuation
increase virtual reality adoption.
Snap reports its patent holdings at cost, though
In wearables, Intel and Google are
Key Points
the intellectual property may hold greater value in
teaming up with watch makers to

Snap
patents could provide
blocking competitors, gaining leverage in lawsuits,
promote their solutions. If Snap
value in licensing deals and
or being used in tax friendly intracompany licensing
replicates this model, it could
competitive barriers to entry
deals. Litigation with Investel's iFrame may preview  Litigation with Investel could
boost adoption, user growth and
the strength of Snap's patents. Snap has about 330
engagement on its core Snapchat
preview the strength of Snap's
patents
issued patents and 200 pending applications
platform with wider margins.

Investel is suing Snap for
worldwide, which it values at about $9.5 million.
Intel has partnered with New
patent infringement in Canada
This reflects an average valuation of about $22,000
Balance, Tag Heuer and Oakley
a patent (about equal to filing costs and attorneys'  Investel licenses patents to
for its wearables chips. Google,
iFramed Canada
fees). Snap reports its patents have a useful life of
Microsoft and Intel are opening
 Investel challenges validity of
3-11 years -- less than a 20-year patent term.
up their virtual-reality platforms
Snap patent on geofilters in
Software technology tends to have a shorter
U.S. litigation, anticipating it
to third-party manufacturers.
could be accused of infringing
lifespan
than
other
inventions.
Snap
may
opt
to
Facebook teamed up with
that patent
abandon patents after 11 years to avoid a $7,400
Samsung for Gear VR.
maintenance fee required to keep them in effect.
Copyright 2017, Bloomberg Intelligence
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BLOOMBERG INTELLIGENCE
A Special Report
Twitter, Facebook, LinkedIn Have Important Lessons for Snap
Snap's IPO comes on the heels of
successes and missteps of "hot
internet startups" namely Twitter,
Facebook and LinkedIn.
Twitter's lost market cap may
teach Snap to focus on its own
strengths and emphasize metrics that
it can improve over time.
Facebook's value appreciation
since its IPO shows the importance of
outperforming high expectations.
LinkedIn's disappointing reset to
its sales outlook in 1Q16 may help
Snap manage expectations more
carefully from the start. Twitter user
growth slowed to single digits in 2016,
Snapchat to Share
Millennial Turf With
YouTube, Instagram
Global Mobile Ad Spending Market Share
Analysis of ad spending by
vertical suggests mobile budgets
allocated to millennials is likely to be
more than $33 billion by 2020. This is
Snapchat's direct addressable
market, which it'll have to share with
incumbents Instagram and YouTube,
as they house similar audiences at
scale. Snapchat likely needs to make
it easier for marketers to advertise on
its platform through programmatic
campaign tools to rapidly gain market
share, offerings it competitors
already have.
Of Snapchat's U.S. users, 85% are
under the age of 35, while 69% of
Instagram's users are younger than
35, according eMarketer data. Google
and Facebook dominate global
mobile ad spending.
while the company's stock price fell
below its IPO level.
Facebook's market cap grew at a
31.5% compound rate annually since
its IPO.
LinkedIn stock price fell about 50%
in 1Q16 as the sales growth outlook
disappointed.
Source: eMarketer
Note: Excluding China
Should Facebook Worry? Instagram Holds The Fort
I
nstagram adopted Snapchatlike features in a short period
of time, which helped propel
the number of daily active users
beyond 400 million globally in 4Q.
In comparison, Snapchat has 158
million daily active users.
If Instagram or regional
U.S. Social Media Age Demographic Breakdown
competitors can corner younger
audiences outside the U.S., Snapchat's
ability to increase users long term may
be hampered.
Snapchat's penetration rate in the
U.S. among younger audiences is
plateauing, making it essential for the
company to expand worldwide for
growth.
Snapchat has a 70% penetration
rate in the U.S. among ages 18 to 24,
according to eMarketer.
Scaling Instagram users is simpler
for Facebook on the back of its 1.8
billion global monthly active users.
Snow, a picture sharing app, is
popular in China, Japan and Korea.
Hike is popular in India.
Source: eMarketer
Copyright 2017, Bloomberg Intelligence
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