Snapchat Company Valuation - Case Study Example

Snapchat Inc Part Introduction Snapchat Inc is a software company whose operations are wholly classified within the software developing industry named after a ‘photo messaging application -snapchat’ which was developed in 2011. The company is publicly held and has an annual estimated revenue of approximately $200,000 with an approximated employee base of between eleven and fifty people. The main software in offer by the company has been the ‘snapchat’ application, a social media application that uses the mobile technology for sharing photo messages. However, the distinctive feature is on how messages posted onto a recipient’s email or page do not have permanency but that they disappear seconds after viewing or that they have life times dictated by the sender. The application has received a great reception in the industry with the majority of the target customers being the youths. Forbes estimate that approximately fifty million persons use the company’s services thus explaining the success the company’s innovation has realized since 20111. It is however to be noted that the company increasingly develops messaging and photo applications used with mobile technologies with facebook posing as the main competitor within the industry. Other leading competitors within this industry are Google as well as the Apple Inc and these form the main institutional references within this industrial analysis of Snapchat Inc. Porters Five Forces In a better analysis and understanding of the prevailing market forces that shape the operation of a firm in any business environment, Porter developed a model that studies the influence of five forces that exert influence to the firm. These forces are rivalry, substitute threats, power by the supplier as well as the buyer and barriers/hindrances to market entry2. As concerns rivalry to Snapchat Company, the competition ratio is relatively low, as the corporation has well established network on snap messages users especially with the young generation who forms the main customer segment. The young find the mobile applications more suited for social purposes such as sharing and communicating with photos, which have a low time span for viewership hence the perceived security/secrecy. With this relatively low rate of competition ratio, this paper interprets it to be favorable for the company. The main strength of the company as perceived emanates from the reason that it has an already well defined market segment and a substantial customer base in use of the software application. However, this report notes that the threat from software substitutes is dominant within the mobile software industry. The company increasingly faces the constant challenge of competition especially from such giant players as the Facebook Corporation, the Google as well as the Apple Inc. Such other companies are intensifying on efforts to take over the market and this comes with the threat of introducing substitutes to mobile applications in use for snap chats. This is illustrated by the recent proposal by facebook to buy the snapchat company (which was rejected)3. Convenience, pricing as well as multi-application with the software designs are the key factors, which influence the pressure as exerted by the substitute product from such rivals. Low priced applications, ease in convenience as well as support of variety of functions shows the main desirable attributes that Snapchat applications seek to enhance for competitiveness in the market. The ‘buyer power’ is understood in the stimulus of a buyer’s decision to the performance of the entire industry. In the technological era and within such a software industry as the Snapchat Inc serves, empowered buyers influences the pricing and competitiveness of the products on offer. On the other hand, ‘supplier power’ describes the impact that the provision of raw materials by the supplier to the company has on the mutual relationship between the company and the supplier(s). When the supplier commands power, he should influence the production and pricing of the software and thus he/she controls the company’s profitability and the industrial competitiveness. In general, this analysis finds that Snapchat Company stands strategically within the software industry having been the pioneers to development of such a social tool for sharing snap messages in 2011. It therefore takes the ‘leadership’ role despite the increasing pressures from such innovations by rival companies in the industry. This however shows that the company has not taken full control of the industry and thus there is free entry as well as exit at will of all players within the industry. Part 2 Company valuation The value of a business as determined through valuation methods yields to the exact worth of the venture, which a potential buyer would have to pay in order to take over the business. Literature shows that number tools are used in application for valuation of businesses majority of which rely on profitability of such business ventures. However, other factors play a significant role in the valuation processes and they include the market sector of operations as well as the business cycle. However, the main consideration that must be put to play is on the nature of operation of the firm at the time of valuation with this implying whether a business entire is making profit(s) of not. This section therefore takes a special attention in analyzing the various methods that would be used to value a ‘loss-making’ trading company. The causes of negative earnings from firms may be explained by interplay of both short and long-term difficulty factors. In case of a temporary factor, an individual company may be influenced by such factors as temporary collapse of a production line or by industry related temporary factors like a credit crunch. Changing preference by customers as well as complete change in demand cycles may explain the long-term factors influencing prolonged record of losses by trading firms. For instance, a change in technology (for the case of such companies as operate within the technology sector) may lender a company’s technology obsolete hence suffering the long-term implications. It is acknowledged that the ratio on price and earnings cannot be appropriate in use for valuation of a ‘non-profit making’ company. The main methods that are often and effectively used in such a valuation are the relative valuation as well as DCF (discounted cash flow) method. DCF: This methodology aims at estimation of a company’s current value through projections of its future cash flow and then discounting them on a predefined discount rate such as a WACC (weighted average cost of capital)4. The method is however quite complex and its application is mostly with loss making value companies. The method requires three main components, which are company’s free cash flows over the projected period, a ‘terminal value’ to be used in accounting for flows beyond the projected period and the main rate of discount5. The interplay of these factors is effective in estimating the current value of a company and any alteration with either would lead to greater effect towards the outcome of the valuation process. EBITDA (Enterprise Value): Through applying, a particular multiple to the EBITDA of a company one arrives at an estimate in the enterprise’s value6. This measure is interpreted to mean a company’s equity added to its debt but having the cash deducted. This method is comparative hence adapting the main advantage in ease of comparison when compared to such other method as DCF7. Besides, this method is simple in conducting the valuation although it is not as rigorous and qualitative as the former. This therefore points to the caution that must be upheld while applying this method in company valuation in that it requires inclusion of all relevant and comparable values. Besides, the method may not suit use in a startup company especially as have not reported EBITDA. In conclusion, therefore, the methods of valuation may vary with each posting particular advantages and shortcomings over the other. This paper however takes particular attention on the two main methods that would be applied to value a company while it records no profits and they are DCF and EBITDA methods. However, keenness in applying the method is paramount for effectiveness and efficiency. Other factors that must be considered are whether the loss phase is permanent or otherwise, the stage of operation of the company as well as the correctness of the estimates. Bibliography Codau, C. 2013, "influencing factors of valuation multiples of companies", Annales Universitatis Apulensis : Series Oeconomica, vol. 15, no. 2, pp. 391-401. Colao J. J. 2014. “The Inside Story Of Snapchat: The Worlds Hottest App or A $3 Billion Disappearing Act?” Forbes. Viewed from http://www.forbes.com/sites/jjcolao/2014/01/06/the-inside-story-of-snapchat-the-worlds-hottest-app-or-a-3-billion-disappearing-act/ Luis, B.P. 2009, "Companies Valuation By The Discounted Cash-Flow Model: Projection Of Ratios And Estimate The Multiple Exit Value", Revista Universo Contabil, vol. 5, no. 2, pp. 125. Picardo E. 2013. “How to Value Companies With Negative Earnings” Viewed from http://www.investopedia.com/articles/investing/121013/how-value-companies-negative-earnings.asp Porter M.E., 2008. 79-80. “The five competitive forces that shape strategy”. Leadership and strategy. Harvard Business Review 79 . Tanzi, G. & Tanzi, J.A. 2006, "PRACTICE VALUATION - using discounted cash flow methodology", Dental Economics, vol. 96, no. 10, pp. 116-122. Vincent J. (2013). So why did Snapchat reject Facebooks huge offer?” Viewed from: http://www.independent.co.uk/voices/comment/so-why-did-snapchat-reject-facebooks-huge-offer-8939529.html Read More