Snap Inc is preparing to list on the New York Stock Exchange (NYSE) in what looks like being one of the most keenly-awaited Initial Public Offerings (IPO) in years. With initial estimates suggesting the $3bn raise will make the company worth about $25bn, investors and analysts are picking over the numbers to discern whether this represents good value or not.

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Critically, will Snap earnings explode like Facebook, or will it do a Twitter and disappoint? Twitter and Facebook offer investors interesting comparisons with Snap. Twitter, ex-growth, is floundering and has just reported a bad revenue miss and another loss. Facebook, on the other hand, is continuing to generate vast advertising revenues.

Sales – price to sales ratio

On the price-to-sales ratio it’s really hard to see Snap as cheap. In fact it’s decidedly pricey when compared with other social media stocks. Facebook trades at about 12 times sales, while Twitter is about trading around 4 times sales. At the valuation being talked about for Snap the company would be priced at 60 times sales.

But comparing Snap sales now versus Facebook and Twitter doesn’t make a whole lot of sense as we have to allow for the former to continue to grow pretty rapidly. However, even when comparing Snap’s valuation with the price-to-sales of others when they listed, it still appears expensive.

Facebook floated on a price-to-sales ratio of 28, while Twitter was close to 45, ie the valuation of $14.2 at the IPO was 45 times the $316m in sales in the prior year. No one buys shares based on past performance of course, but on future returns. At least that’s what Snap’s owners are hoping.

Market Cap

Snap sounds expensive at $25bn, but that’s just scratching the surface of Facebook’s market value. The market cap of Facebook is around $387bn – or about 15 times the proposed valuation of Snap. When Facebook floated it was valued in excess of $100bn. Twitter ended its IPO day with a market cap of around $25bn.

Revenues

Facebook achieved $8.81bn in the last quarter (Q4 2016).  In fact it grew sales 54% in 2016 to grow revenues to $27.6 billion last year, which is roughly 68 times Snap's sales. At the time of its IPO, revenues were $3.7bn. Snap's are about a tenth of that.

To be fair to Snap, revenues are expected to grow a lot. According to eMarketer, Snapchat double its total US annual revenues this year, from $348 million to $804 million in 2017.

Profit/loss

Critically, Facebook had booked a $1bn profit in the year before its IPO, while Snap is coming into its floatation after losing around $515m in 2016. Twitter also booked a loss in the year before its IPO of $79m.

As the latest quarterly results from Twitter show, influence and reach doesn’t equate to ad dollars. Snap knows this, too. In the S-1 filing with the US Securities and Exchange Commission, the company said it expects "to incur operating losses in the future, and may never achieve or maintain profitability".

Users

Snap has a problem that its execs will need to explain – user growth is slowing. Snapchat added 15 million users in each of the first three quarters of 2016, but this decelerated to just 5 million in the last quarter – the weakest increase since Q3 2014. Revenues can only grow so much when user growth is not leading.

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