Snapchat’s parent company Snap has finally filed for an IPO.
The disappearing-message company finally revealed details of its business for the first time in its long awaited S-1 filing Thursday. Snap plans to go public on the New York Stock Exchange in March, under stock ticker symbol—yes, we guessed it—”SNAP.”
There’s a lot for investors to like in Snap’s IPO filing. The most attractive attribute of Snapchat’s owner, of course, is its eye-popping sales growth rate: Snap’s revenues septupled in 2016 to $404.5 million. That’s an increase of 600% over the less than $59 million the company made in 2015.
Compare that growth rate to Facebook (FB), which pleased shareholders by growing its sales 54% in 2016. Then again, Facebook made $27.6 billion in revenue last year, or about 68 times Snap’s sales.
But the Snap IPO filing also discloses a lot of elements of the Snapchat company that may scare investors off, or at least they should. For one thing, there’s the shareholder-unfriendly corporate governance structure that gives 26-year-old CEO Evan Spiegel near absolute control, or the fact that Snap says it doesn’t have any intention of paying cash dividends, possibly ever.
The really terrifying part about Snap stock, though, and the one that investors should pay the most attention to, is how absurdly expensive it will be. Snapchat has reportedly been seeking a $25 billion valuation. While the IPO filing does not say how much Snap stock will cost when it begins trading (Snap shares have yet to price), which would provide the value of the overall company, it does offer clues of what valuation would be in the realm of reasonability. And $25 billion is way, way too high.
For context, first note that Snap lost $515 million last year, or 38% more than it lost in 2015. That makes the typical stock valuation metric, the price-to-earnings ratio (or P/E), irrelevant. Instead, we’ll use the price-to-sales metric, dividing Snap’s market valuation of $25 billion by its revenues. The result is almost literally off the charts:
Snapchat’s parent company is asking for a valuation of nearly 62 times its revenue. Facebook, on the other hand, which is Snap’s most comparable industry peer in that it owns its own photo sharing app Instagram, has a price-to-sales ratio of less than 13 times. Sure, Facebook is growing slower (though not slow, by any means), but it also has something very important Snap doesn’t have: Profit, to the tune of more than $10 billion last year.
Other Internet and social media stocks, including Google parent Alphabet (GOOGL), Yelp (YELP), and Twitter (TWTR), are even cheaper relative to their revenue. GoPro (GPRO) stock, which could be comparable to Snap (now that the Snapchat owner is billing itself as a “camera company”), trades at just one times sales.
The bigger problem for Snap will be justifying that high valuation with growth. Though it’s true that revenue is increasing rapidly, growth in the number of people using its app has slowed considerably. On top of that, Snap’s sales are growing fastest in other parts of the world besides the U.S. and Europe, increasing 53% in the fourth quarter year over year there, but only 39% in North America. Still, the U.S. and North America account for about 90% of Snap’s overall revenue.
Indeed, Snap warns in its IPO filing that its expenses are also increasing rapidly, and could outpace revenue growth for a long time. The number of Snapchat employees for one, more than tripled to 1,859 in 2016. At a valuation as high as Snap’s is likely to be, investors are betting on a future dream of earnings that is still so far away, it may disappear before that day ever comes.