Snap Inc.'s $20 To $25 Billion Valuation: Are Millennial Eyeballs Worth This Much?

Snap, Inc., the parent company of Snapchat has come a long way. In 2013, Snapchat's founders turned down $3 billion in cash from Facebook. At the time, the company had close to zero revenue and a little over one million daily active users (DAUs).

Fast forward four years: Snap filed its IPO at a valuation of $20 to $25 billion with 158 million global DAUs on Snapchat (69 million in North America) and a mere $404.5 million in revenue in 2016. Snap additionally reports a net loss of $514.6 million in 2016.

But Forrester is wondering: With a limited track record in revenue generation, an audience that skews young, and a heavy reliance on mobile ad revenue, is the optimism around Snap warranted?

Here's what works in Snapchat's favor:

  • Snapchat is a sticky mobile app. Snapchat scores a 283 on Forrester's App Engagement Index. High for sure, but far lower than YouTube (692) or Facebook (1,000). Snap's community spends an average of 25-30 minutes per day in the app. That is a big chunk of the approximately 3 hours per day that millennials spend on their phones, and it's consistent with Forrester's analysis that consumers spend 88% of their time in just five apps. Brands should meet customers where they already are--in apps like Snapchat--because consumers are reluctant to download branded apps unless they use those apps often.

  • Snapchat owns more mobile moments with Millennials than Facebook or Google do. While only 12% of US adults use Snapchat, 42% of Gen Zers and 21% of Gen Yers do. The adoption rate drops off dramatically from there, with only 7% of Gen Xers and 2% of Younger Boomers using Snapchat at least monthly.
  • Snapchat users love video - a new engagement opportunity for brands. Snapchat users spend 25 to 30 minutes per day in the app, so it's easy to conclude they're watching a lot of video. Between now and 2021, video will account for 76% of the incremental mobile display ad spending. Snap has capitalized on video by delivering more publisher content in Discover as well.
  • Here's what's working against Snapchat:

    • Millennials still have no money. Millennials have very little disposable income, limiting the financial upside for brands targeting them. Millennials are burdened by school loans, can't afford cars or family lifestyles, and live at home longer.

  • Silicon Valley tech giants own a bigger audience. Google and Facebook have developed portfolios that allow them to simply own more mobile moments with consumers of all ages than Snap does. Google alone has a huge portfolio of mobile services including maps, email, calendar, video streaming (YouTube), a virtual assistant, search engine, and of course, the entire Android operating system.
  • Google and Facebook own more consumer data. Both Google and Facebook know a lot more about their audiences than Snapchat does. Google knows almost every detail about our everyday lives: what we want to buy, where we go, and how we get there. Facebook knows who our friends are, what brands we like and what we are passionate about.
  • Snapchat's audience is limited. Snap hasn't proven it can penetrate older age groups, or those who do have substantial spending power. Snapchat use is 50% lower for those ages 25 years and older
  • Consumers are fickle. Anyone remember MySpace? It takes less than a minute to find and download Snapchat to a smartphone. It takes less than 10 seconds to delete the app if it becomes less relevant, interesting or entertaining because something new takes its place.
  • Like any newcomer in this space, Snap has its work cut out for it. There are a lot of free apps looking to monetize eyeballs and data. Looking at the success of companies like Facebook, it is easy to dream big. Few see the labor that goes into attracting some of the best engineering talent in the world, the pivots in strategy and technology, a cultural that embraces failure to learn and grow fast and more.

    This article is co-authored by Laura Naparstek, researcher at Forrester.