By: Dexter Braff
So how do you take a company that began as a sexting app and is now loved for plastering dog faces over selfies, whose very existence depends upon an extraordinarily fickle, teenager-fueled market – a company that lost more than $500M on sales of just $400M – and get to a valuation of 28 billion dollars?
Well, you could resort to the absolute value method of valuation, where inflated multiples are applied to the absolute value of a company’s losses, so that the more a company loses, the more its worth.
Or, you could play spreadsheet scrabble and plug in whatever numbers it takes to project go-forward cash flows that magically discounts back to $28B – and conjure up a reason to justify them later.
Alternatively, you could take the loony metrics from some other fever dream inspired valuation and apply them here, because, you know, it could happen.
In the end, however, the “Coors Cold Hard Facts” are that there is simply no mathematically rigorous, risk-return informed calculation that can get you even close to $28 billion (without snorting a line of pixie-dust).
You see, Snapchat’s fortunes are just too speculative, too unpredictable , too risky, to arrive at a valuation that’s far more indicative of a sure thing.
But get there it did. So the question is how?
It’s actually quite simple – if not astonishing.
Basically, it comes down to the madness of crowds.
Snapchat is worth $28 billion because enough people say it is. And in the public markets, that’s all that counts.
The text books like to suggest that the market is rational. That it is based on reasoned assessments of revenues, growth, profits, and the risk attendant to realizing them.
And, to at least some extent, it is.
But the market is also as rational as the investors playing in it – investors that can be swept up in a crowd of “likes” that create momentum – and value – out of nothing more than enthusiasm (which, of course, is why even the faint whisper of a negative nothing can instantly vaporize the value of a stock light on fundamentals, and long on, well, vapor).
So what does this mean when you’re valuing the next Snapchat or a high-flying acquisition candidate for that matter?
By all means, do the math.
Then check with your neighbor.
[*] This is the second of a two-part post on Snap Chat following “If We Performed as Well as Snapchat’s Bankers, You’d Sue Us.” Note that we’re not picking on Snapchat; rather our thoughts are intended to be an illustration of what we often see in high-tech, high-profile, initial public offerings.