Snap Inc.'s IPO - Bloomberg Professional Services Inc.'s IPO Sales growth at Snap over ......

Copyright 2017, Bloomberg Intelligence

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Snap's difference is its very engaged young users and an aggressive push into content-creation 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.

Snap Millennial Power Needs

Execution to Top Facebook

Snap Revenue by Geography ($ Millions)

Source: Company Filings

S nap's robust growth in average revenue per user

should keep propelling its top-line as it's only just begun monetizing its 158 million daily users.

Snap's revenue grew sevenfold in 2016 to $404.5 million, yet ARPU was less than a 10th of Facebook.

Key catalysts for 2017 include new tools for automated buying, ad budgets moving away from Twitter and Yahoo and Spectacles unit ramp.

Snapchat global ad sales may surge 231% to $936 billion, eMarketer says, which translates to 1% of ex-China mobile ad spending.

North America, including Mexico and the Caribbean, made up 89% of Snapchat's 2016 revenue, Europe 8.8% and the rest of the world 1.9%.

Snap's Spectacles product could generate $200 million in 2017 sales, based on Bloomberg Intelligence analysis.

Revenue Set to Rocket on Mobile Ads, Spectacles

Snap Inc.'s IPO

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.

By Jitendra Waral BI Senior Industry Analyst

Contributing Analysts: Paul T. Sweeney (Media) Matt Larson (Litigation) Gregory Elders (ESG) Sean Handrahan (BI Associate)


BLOOMBERG INTELLIGENCE A Special Report

User Expansion

Momentum

Requires Geographic

Diversification 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 service and almost 40% of those aged 25 to 34, according to ComScore data.

More recently, penetration has picked up in the 35-and-older bracket. User growth outside of North America was higher than 50% throughout 2016,

but growth flattened sequentially in 2H.

About 88% of Instagram's users are outside the U.S. compared with

66% of Snapchat users, according to eMarketer data and company filings.

Instagram has 400 million daily users, while Snapchat has 158 million.

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.

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.

Snapchat Users, Demographic Penetration Rate

Source: ComScore Note: RHS Among U.S. Smartphone Users

Snapchat's Addressable Base of Young Users

Source: eMarketer, ComScore, Bloomberg Intelligence Analysis Note: Millions



Vurb Acquisition

Helps Snap Chase

Facebook and Yelp

on Local Ad Front 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-to-consumer interactions, while Yelp is encouraging similar features. Vurb is a contextual search engine for mobile that provides information and suggestions based on user location and

preferences, similar to Google Now.

Longer term, Snapchat may aim to capture a share of location-based advertising by building traditional

discovery features directly into its application. Vurb may also help Snapchat gain information for ad targeting when users perform searches

T he scalability of Snap's revenue likely depends primarily on its two core ad

product offerings, 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 Creative tools, which

include Geofilters and Lenses and are sold only by Snap.

The company offers an API to let

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.

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

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 millennial-focused hardware for consuming and creating content, potentially paving the way for entry into the

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.

Location-Targeted Ads Becoming Common on Mobile

Source: BIA/Kelsey

Snap's Revenue Outlook Counts on Scaling Its Ad Products

Snap U.S. Ad Sales Forecast

Source: eMarketer ($ Millions)



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.

Snap's ad revenue growth this year may get a boost from a weakening grip on market share for Twitter and Yahoo.

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 2009-13, 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.

$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.

Snap Sales Growth Can Match Facebook, With Strong Execution

Spectacles Purchase Intent (Users Aware of Them)

Source: Bloomberg Intelligence Poll

Note: N=687, among respondents who said they were aware of Spectacles



Snap Can Mirror Google, Intel

Wearables Trick Snap's plan to use hardware

to foster content creation can benefit from the partnership strategy applied by Google, Intel, Microsoft and Facebook. Each of those companies are partnering with hardware manufacturers to increase virtual reality adoption. In wearables, Intel and Google are teaming up with watch makers to promote their solutions. If Snap replicates this model, it could boost adoption, user growth and engagement on its core Snapchat platform with wider margins.

Intel has partnered with New Balance, Tag Heuer and Oakley for its wearables chips. Google, Microsoft and Intel are opening up their virtual-reality platforms to third-party manufacturers. Facebook teamed up with Samsung for Gear VR.

Snap's $19.4-$22.2 billion 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 of 19.6x, while Twilio's recent offering had a multiple of 18.3x.

Snapchat had 158 million average daily active users in 4Q, according to company filings.

Snap reports its patent holdings at cost, though the intellectual property may hold greater value in blocking competitors, gaining leverage in lawsuits, or being used in tax friendly intracompany licensing deals. Litigation with Investel's iFrame may preview the strength of Snap's patents. Snap has about 330 issued patents and 200 pending applications worldwide, which it values at about $9.5 million. This reflects an average valuation of about $22,000 a patent (about equal to filing costs and attorneys' fees). Snap reports its patents have a useful life of 3-11 years -- less than a 20-year patent term. Software technology tends to have a shorter lifespan than other inventions. Snap may opt to abandon patents after 11 years to avoid a $7,400 maintenance fee required to keep them in effect.

Snap's $22 Billion IPO Falls Into Line With Facebook's Price-to-Sales, Snapchat Revenue Forecast

Source: Company Filings, eMarketer

Snap's implied market cap value per daily active user, using the high end of its valuation range, trails that of Facebook at its IPO. This may reflect the fact that Snap has yet to leverage its rapid sales growth into operating profitability.

Facebook recorded $2.91 billion in adjusted Ebitda in 2012, its IPO year.

Snap had a $554 million Ebitda loss in 2016. Snap's fully diluted IPO valuation may range from $19.4-$22.2 billion, according to company filings. Facebook's IPO valuation was $104 billion.

Snapchat had 161 million daily active users in December. Facebook had 526 million in March 2012, prior to its IPO.

Value Per Daily User Is a 30% Discount to Facebook

IPO Market Cap Per Daily Active User

Source: Company Filings (Assumes Snap Valued at $22.2 Billion, Fully Diluted)

Key Points Snap patents could provide

value in licensing deals and competitive barriers to entry

Litigation with Investel could preview the strength of Snap's patents

Investel is suing Snap for

patent infringement in Canada

Investel licenses patents to

iFramed Canada

Investel challenges validity of Snap patent on geofilters in U.S. litigation, anticipating it could be accused of infringing that patent

Patent Trove Has Worth Beyond $9.5 Million Valuation



Snapchat to Share

Millennial Turf With

YouTube, Instagram 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.

I nstagram adopted Snapchat-like 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

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.

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,

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.

Twitter, Facebook, LinkedIn Have Important Lessons for Snap

Global Mobile Ad Spending Market Share

Source: eMarketer Note: Excluding China

U.S. Social Media Age Demographic Breakdown

Source: eMarketer

Should Facebook Worry? Instagram Holds The Fort



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