Gawker’s Sam Biddle has obtained internal financials showing that between January and November 2014, Snapchat had revenues of just $3 million while posting a net loss of $128 million. Biddle asks: “How in the hell did it convince investors it was worth $15 billion?”
People are underestimating Snapchat just like they underestimated Facebook
The Washington Post’s Brian Fung shares Biddle’s skepticism, suggesting that Facebook’s Mark Zuckerberg dodged a bullet when Snapchat turned down a $3 billion acquisition offer and writing that Snapchat “lacks a clear road to profitability.”
But it’s actually pretty easy to see how Snapchat could wind up being profitable.
In fact, almost every one of today’s big internet companies — Yahoo, Google, Facebook, and Twitter — faced similar skepticism in their early years. Back in 2007, Kara Swisher (who now runs Re/code which, like Vox.com, is part of Vox Media) expressed astonishment that Facebook could be worth $15 billion. A year before that, a Slate headline read “$1 Billion for Facebook? LOL!” (Facebook is now worth $260 billion.)
Then each of these sites made a ton of money with advertising. With hundreds of millions of users, they’ve been able to generate billions of dollars in revenue. Facebook, Google, and Yahoo have all generated big profits. Twitter hasn’t turned a profit yet, but it generated $1.4 billion in revenue in 2014 and is on track to take in more this year.
Snapchat is following the roadmap laid out by its predecessors. Facebook’s ad revenue was paltry until it signed an ad deal with Microsoft in 2006. Twitter waited until 2010 to announce its advertising plan. Both companies’ advertising revenues surged as their user bases and sales forces grew.
So there’s every reason to think Snapchat’s ad revenues will be large once the company has finished building its ad-sales machine. Snapchat says it has 100 million daily users who watch 2 billion mobile videos a day. This is a hard figure to compare with other sites, which measure their audience in different ways. But at worst, that makes Snapchat a third the size of Twitter, which has about 300 million monthly active users. Twitter is worth $19 billion, suggesting Snapchat would be worth at least $6 billion.
Of course, Twitter’s growth has stalled, whereas Snapchat may still be growing quickly. The data leaked to Biddle doesn’t give user growth numbers, so we can’t estimate how big Snapchat will be in a year or two. But it’s not crazy to think the 4-year-old app might still have significant growth ahead of it.
A company’s early ad revenue just doesn’t tell us anything interesting about its long-term earnings potential. It takes a while for a company to hire a sales team, settle on an effective advertising format, and build awareness among potential customers.
But while it might take time for Snapchat to build a successful advertising program, there’s little doubt that it will be able to. Every day, 100 million people open up the Snapchat app. As long as that’s true, advertisers are going to be willing to pay top dollar to reach them.
