What You Learn When You Compare Snapchat to Other Companies Valued at $19 Billion

When you're hot, you're hot. And when you're discussing valuations, you should probably discard logic, experience and history.

Snapchat may or may not be worth $19 billion. Hey, maybe that's a lowball estimate. Revenue? Profits? When did they ever matter for a smokin' hot potential IPO?

And this is not to say that there is no value there. Just that the measures by which potential and market interest and financial sustainability are assessed may not be those you learned in introductory accounting - or economics.

$19 billion makes it bigger than some industrial age behemoths like Alcoa. It also makes is smaller than LinkedIn, Twitter and Intuit. Which means that perception and, more to the point, factors with which you may not be conversant, like who could usefully combine with a Snapchat, or what newer technologies or businesses are coming in for a landing, could be the data points that determine its ultimate success. Disregard nothing you hear - or see.  JL

Jason Karaian reports in Quartz:

If it’s the next Facebook, then what looks like a lofty valuation today could prove a bargain tomorrow. But if its fundraising prowess is more a function of a venture capital bubble, investors may look back at the traditional market metrics and shake their heads.

A company is worth whatever people will pay for its shares. That price is presumably based on future expectations for sales, profit, cash flow, and the like—but often, these “fundamentals” take a back seat to other purported measures of value.

With that in mind, consider the rumors that photo-sharing app Snapchat is in the market for venture funding that values the firm at up to $19 billion. The red-hot social-media startup only recently started generating revenue (profit is for squares).

At $19 billion, Snapchat would rank third among all venture-backed companies in terms of value, behind Xiaomi and Uber. If you took its reported valuation as a (very) rough proxy for what it would fetch on the public market, Snapchat would sit among some very big, and very profitable, companies listed on US stock exchanges:

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Now, it doesn’t make much sense to compare Snapchat to aluminum giant Alcoa, given that investors will almost always put a higher value on an asset-light internet company’s growth prospects than for a company in a mature, cost-intensive industry. But it is interesting nonetheless to see who Snapchat’s near neighbors might be on the stock exchange. By this measure, the firm behind an app whose users share 700 million disappearing photos daily could be worth the same as a company that ships 13,000 metric tons of aluminum products every day.

Narrowing it down to just technology service companies, here’s where Snapchat would fit in:

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Snapchat discloses precious little information about its business—nothing on user numbers, revenue, or profit. It is clearly growing fast and attracting millions of young fans—fans advertisers are keen to reach and investors are eager to monetize. If it’s the next Facebook, then what looks like a lofty valuation today could prove a bargain tomorrow. But if its fundraising prowess is more a function of a venture capital bubble, investors may look back at the traditional market metrics and shake their heads.