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Slingshot, Snapchat & the 'Ephemeral Messaging' Market

After Facebook's failed attempt at purchasing Snapchat, they tackled the ephemeral messaging market on their own with Slingshot. We take a look at the numbers that could prove this Facebook investment to be a highly profitable one.

In June, Facebook released its own ephemeral messaging app -- Slingshot -- which, like Snapchat, allows you to send self-destructing photos and videos at the tap (or hold) of an on-screen button. The app is Facebook’s second attempt at a Snapchat clone, and also comes after Snapchat’s rejection of Facebook’s $3B bid.

In the spirit of openness, the app allows anyone with your username to sling to you (i.e., a privacy by obscurity model) and encourages user engagement by requiring that you sling back to someone in order to unlock received messages. This reply-to-unlock feature is arguably the main point of differentiation between Slingshot and Snapchat, and one that may very well drive adoption (although the responsibility of reciprocation may deter some users from actively engaging in the app.)

To some, it may still be questionable why Facebook has spent so much time building an app that has yet to establish a revenue model. People were appalled when Evan Spiegel of Snapchat rejected a $3B offer for a revenue-less business built in a couple of years.

When valuing companies, analysts often will ask themselves what they will need to believe about financial inputs (say, revenue or earnings) to believe the validity of a desired output (e.g., valuation). So consider the following:

  • According to Yahoo! Finance, Facebook (FB) currently trades at 86 times earnings and is worth 17 times revenue. Facebook’s profit margin is approximately 25%. Google (GOOGL), as an example of a more mature company, currently trades at 30.80 times earnings and is worth 5 times revenue. Their profit margin is a little lower than 25%.
  • The average conversion rate (“the proportion of visits to a website who take action to go beyond a casual content view or website visit, as a result of subtle or direct requests from marketers, advertisers, and content creators” according to Wikipedia) is around 1-3%.
  • Google charges something like $1+ for their cost per click.

With this in mind, let’s outline a couple of assumptions for Snapchat:

  • Let’s say Snapchat will trade around 20x earnings or 6x revenue. This is a pretty conservative assumption for a smaller company, given that mature companies trade at around those ranges. Let’s also assume that their profit margin will be 25%.
  • Let’s assume that Snapchat can achieve a conversion rate between 0.5% and 2%.
  • Let’s assume Snapchat can charge 20 cents as their cost per click.
  • In May of this year, they announced that they reached 700M snaps a day. (They were at 400M last November).

Given these inputs, the following is a table of potential valuations for Snapchat (in millions of dollars). Using the most conservative parameters Snapchat (or a Snapchat clone with similar engagement numbers) is worth a hefty $1.3B, which, although is lower than the $3B that Facebook offered, still generates a nontrivial $255M a year.

Snaps/day

conversion rate

revenue/day ($)

revenue/year ($)

earnings/year ($)

earnings multiple valuation ($)

revenue multiple valuation ($)

700M

0.005

0.7

255.5

63.875

1277.5

1533

800M

0.005

0.8

292

73

1460

1752

700M

0.01

1.4

511

127.75

2555

3066

800M

0.01

1.6

584

146

2920

3504

700M

0.015

2.1

766.5

191.625

3832.5

4599

800M

0.015

2.4

876

219

4380

5256

700M

0.02

2.8

1022

255.5

5110

6132

800M

0.02

3.2

1168

292

5840

7008

If an app like Snapchat can keep growing at this rate, then the back-of-napkin calculations above speak for themselves -- this is a potentially huge market for Facebook to try to tap into, if not through an acquisition, then through organic development of their own version of the app.

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The information contained in this post, while intended to interest investors, does not constitute investing advice or services. Future trends and predictions contained herein are derived from industry news and public information. These “forward looking-statements” are speculative, subject to risks and uncertainties, and are not guaranteed. Actual results may vary. Potential investing decisions should be made by consulting a professional legal, tax, investing or accounting professional, where risks and suitability can be throughly evaluated. DataFox makes no obligation to update or revise any of the statements contained herein.