Here comes the Snap IPO

Big news from the tech world in recent weeks was that Snap, the parent company of the popular messaging app, Snapchat, is preparing for an initial public offering that would value the company at around US$25 billion.

Like Facebook, Twitter and other apps, Snap makes most of its money by selling mobile advertising. While the global advertising market typically grows at around 6% per annum, online advertising is growing much faster than offline advertising, at around 15% per annum; and then within online, mobile is growing faster still.

The opportunity for mobile advertising continues to look prospective. As illustrated below, US consumers are spending around 25% of their media-consuming-time on mobile devices; and yet only around 12% of advertising dollars are being spent in this channel. This will surely increase at the expense of print and TV.

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Source: KPCB

But Snap has something that all mobile apps dream of: immense popularity amongst millennials. As illustrated in the chart below, a survey of American teens conducted last year shows enormous growth in the popularity of Snapchat – which comes at the expense of Facebook and Twitter. Instagram, owned by Facebook, remains enormously popular.

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Of course the next logical question is: why does this matter? Well, millennials represent around 27% of the US population (which makes them the largest generation); and their spending power is set to increase significantly over the next two decades.

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Source: KPCB

These attributes position Snap extremely well. It is becoming a market leader in a growing segment with enormous popularity amongst the highest-value age-cohort. These represent fantastic tailwinds which will result in significant organic growth. (See here why this is so valuable).

So should you buy into the IPO? At this point, we do not know. We will wait for the financials and the structure to be disclosed. Only then can we make an assessment of a fair valuation range for Snap. In the meantime, keep an eye on the millennials.

Screen Shot 2015-11-11 at 12.08.48 pmAndrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +61 2 8046 5000.

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