Mar 07 Business Valuation Case Study: Snapchat
On the surface, the value of a business appears to be a relatively straightforward concept. A closer look, however, reveals the reality that business valuation can often be a complicated process. Businesses and their owners may require a business valuation for a number of business-related reasons. In the process of mergers and acquisitions, for example, both the business buyer(s) and seller(s) may seek business valuations, often independently, to protect their interest over the course of the transaction. Shareholder disputes and assessing the value of stock options are other reasons business valuation may be necessary over the course of a business’s lifetime. Outside of the business itself, financial aspects of the business owner’s personal life, such as matrimonial events or estate and gift taxes, will require an up-to-date business valuation. Not only are valuations required in a variety of situations, but there are a variety of ways to value a business as well. Some of the more common ways to value a business are by assessing the business’s income, the assets or the relative market value of the business. A combination of all those methods may also be used. Those interested in the nature of business valuations were recently provided an interesting case study thanks to the popular social media platform Snapchat and the IPO of its parent company, Snap.
Recent Snap IPO
Snapchat’s parent company recently held its IPO (Initial Public Offering) that saw its shares rise 44 percent over the course of the stock’s first day. The company finished the day trading at $24.48 per share. The price of each share equals a market capitalization of around $33 billion—in some degree, that means the business is worth that much money. Though this was an impressive IPO by any standard, it was not as large a valuation as other recent tech companies who have gone public like Facebook, Twitter or LinkedIn. What was interesting about Snap’s value, to most observers, was that the company has thus far failed to turn a profit. Prior to going public, the company’s revenue was around $460 million, but its costs/expenses were around $634 million. Obviously, if investors were strictly valuing the company based on their income, they would not have valued the company anywhere near $33 billion.
Why It Is Highly Valued
Snap received such a high business valuation, despite the fact that it is losing money, for a number of reasons. For one, the gap between the company’s revenue and expenses has been closing steadily; their revenue is soon expected to eclipse their costs. Another reason the company is so highly valued is its projected revenue in the future. Due to a variety of factors, many believe that Snap is well positioned to capitalize on unique and innovative revenue streams in the future. One such projection is that, as television viewers and ratings decline, the social media video platform will be in a position to make lucrative advertising deals, especially due to the coveted younger demographic of their users.
Whether or not Snap ultimately lives up to its early valuation, it will remain an interesting case study in how market projections can be used to value a business. Consult with a Clifton NJ business valuation services provider to help determine the right methods and people to work with in order to effectively value your business.