Do It Yourself Stock Investor

The Swift FCF Yield: Snapchat, Inc.

Q1 2017

Snapchat FCF Yield and coffee

Snapchat, Inc. (NYSE: SNAP) is a social share app within the niche of Twitter (NYSE: TWTR), Facebook (NASDAQ: FB), Instagram, etc. The user base and valuation, however, are not as prominent.

On Thursday, March 2nd, Snapchat publicly traded for the first time with an opening price much higher than shares purchased behind the scenes, subject to lockup restrictions. There was an estimated 47% increase of the PPS on day one. Some pull-back began on day three, March 6th, but the approximate market capitalization still overvalued the stock near $28.33b. Certainly this is momentum, excitement and also hype. With the lack of fundamental value, this is not basic stock investing.

Keep in mind that a $28.33b valuation for Snapchat is absolutely crazy. Someone needs to wake up and smell the coffee. The 2016 annual report shows the company created a negative free cash flow (FCF) and it's total revenue was less than cost of goods sold. Total revenue of less than $0.5b and a current traded value of $28.33b... What is the big dream that we are not realizing?

"We estimate that our net proceeds from the sale of our Class A common stock that we are offering will be $2.4 billion (or approximately $2.6 billion if the underwriters’ option to purchase additional shares of our Class A common stock from us is exercised in full), based on the initial public offering price of $17.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us." SEC PROSPECTUS

The big dream is that this sudden excess cash from the IPO could allow for meaningful acquisitions, product development and steal users/market share away from competitors. The cynical big dream is this momentum will just explode the price up for a quick trade and then plummet for a great short. Thus, allowing a good trader to make money on both sides. All the while, insiders can make their money with options/RSUs and other underwriter cooperation.

Free Cash Flow (FCF) Yield

Snapchat has no free cash flow or FCF Yield to speak of; it's in the negative range. When compared to competitor Twitter, Inc. it looks largely inferior. Additional valuation comparisons are quickly shown in a recent tweet by David Dierking:

Snap is looking a little expensive. $SNAP

— David Dierking (@David_Dierking) February 26, 2017

The FCF Yield for Snapchat, Inc. at the end 2016 was derived from their FCF loss of -$677.68m. The negative figure reflects a CapEx greater than their cash from operating activities/a loss in operating activities, as is the case. The FCF Yield is of little help with further understanding the company in comparison to others; it's simply lacking FCF. Twitter on the other hand, had a over $500m in FCF and a modest yield of 4.74%.

Snapchat FCF Yield Chart

Free Cash Flow is tabulated by taking the value of the company's operating cash flow and subtracting from it the value of capital expenses. The yield is then formulated by dividing the result by either the market capital or enterprise value.


Disclosure: I am/we are long FHCO; I/we have no positions in $SNAP or $TWTR, and no plans to initiate any positions within the next 72 hours.

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image source: derivative of "Today's latte, Snapchat." by Yuko Honda (CC BY-SA 4.0) with a NASDAQ graph.