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Here's how Snapchat could justify a $25 billion valuation

JP Mangalindan
·Chief Tech Correspondent

It’s official: Snap Inc., the parent company of Snapchat, is going public in an IPO that could value the company anywhere between $20 billion and $25 billion.

To be sure, it’s a landmark moment for the photo-messaging app, which cofounders Evan Spiegel, Bobby Murphy and Reggie Brown launched just over five years ago and now attracts over 60 million daily active users. But is Snap Inc. really worth as much as $25 billion?

Simply put, “yes,” according to Charlene Li, CEO and founder of Altimeter Group, the San Francisco, Calif.-based internet research and consulting firm.

One need look no further the top line of Snap Inc., whose main product involves sending self-erasing photos to your friends. Earlier this year, leaked documents revealed the startup expects to generate between $500 million and $1 billion in revenues in 2017, a healthy figure backed by third-party digital research firm eMarketer. Indeed, eMarketer expects Snap Inc. to make $935.5 million next year, up from $366.7 million in ad sales in 2016.

“The revenues are really good quality revenues,” explains Li, who views a 20 to 1 ratio of valuation to revenues as solid. “These are brand marketers who are saying, ‘Hey, they are shifting brand dollars — real brand dollars on other parts of the budget — to Snapchat.’ More than anything else, because people are engaging with them, it is also a way to tap into something that is completely private as opposed to Facebook or Twitter.”

While Facebook’s revenues, in particular, continue to exceed Wall Street expectations, driven largely by robust mobile ad sales, Snapchat’s success with brand marketers seems more surprising, given Snapchat’s inherent product focus is based around privacy.

Content posted on Facebook (FB) and Twitter (TWTR) is more geared towards public consumption, or at least consumption by a larger group of people. That’s less so the case for Snapchat, which originally launched in September 2011 as an ethereal messaging app where messages from one user to another vanished in 10 seconds or less.

But as Snapchat matured so did its product, and Spiegel, Snapchat’s CEO, has proven incredibly savvy in expanding the app in ways that seemed counterintuitive at the time but built and expanded user engagement. In January 2015, for example, Snapchat launched Snapchat Discover, which allowed media outlets from Cosmopolitan to The Wall Street Journal to publish content in a new section of the app.

More recently, Snapchat helped popularize augmented reality with Snapchat Lenses: masks, designs, and graphics that digitally superimposed on your face. A Cinco de Mayo lens on the app sponsored and paid for by Taco Bell received 224 million views, for example. Since Lenses, like other Snapchat content, disappear daily — unlike Facebook or Twitter content, which unless deleted, lingers in the digital atmosphere forever — those stats are even more impressive.

WhatsApp is not a good advertising platform,” explains Li, referring to an encrypted messaging service for smartphones. “But Snapchat is fantastic as an advertising platform because it is made for brand advertising because of the visual element of it. I think they’ve been very smart about tapping into this.”

Even more impressive? Where Spiegel potentially takes Snap Inc. from here. Besides an impending IPO, expected next March, the startup released Spectacles this September — a pair of camera-equipped glasses. Just as Facebook experimented with hardware, first with a failed Facebook phone, then the $2 billion acquisition of VR headset maker Oculus, the launch of Spectacles signals Spiegel and Snap Inc. are likewise interested in more than simply controlling the software end but also the hardware that people use to take snaps.

In other words, there’s much more to come from the company once written off as a mere “sexting app.”

JP Mangalindan is a senior correspondent for Yahoo Finance covering the intersection of tech and business. Follow him on Twitter or Facebook.

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