A Snapchat IPO in 2017?

Image source: Snapchat.

There are only five privately held start-ups in the world valued at or higher than Snapchat's recent $20 billion valuation.

The vanishing-video giant is already appreciably more valuable than Twitter (NYSE: TWTR), having recently surpassed the microblogging platform in terms of daily active users (DAUs). Rather, Snapchat's user engagement, revenue growth, and loft valuation place it on an arc akin to Facebook's (NASDAQ: FB) pre-IPO roadmap.

Either way, one thing is clear in looking at the vanishing-video dynamo: A Snapchat IPO is a sure thing in the coming years. Here's why.

A Snapchat IPO is in the works

Those convinced today's largest unicorns, called decacorns by some, will remain private have another thing coming. Case in point, Snapchat co-founder and CEO, Evan Spiegel, admitted as far back as June 2015 that Snapchat indeed plans to perform an IPO.

When asked about the topic, point-blank, at last year's Recode Code Conference, Spiegel coyly responded: "We need to IPO. We have a plan to do that." 

It doesn't get much more definitive than that. However, the speculation that Snapchat, and its cohort of multibillion dollar start-ups, could even elect to stay private was a farce. A recent article from global management consultancy firm McKinsey & Company echoed this notion. Specifically, McKinsey analysts argued IPOs are essentially inevitable for successful tech companies like Snapchat, Uber, Airbnb, and others for two key reasons.

Image source: Snapchat.

First, U.S. regulations limit the number of shareholders that can exist for a privately held company. Case in point, exceeding the old limit of 500 investors was the underlying trigger that initiated the 2004 IPO of Alphabet's Google. However, the U.S. JOBS Act recently increased the IPO mark to 2,000 investors -- employees in stock-based compensation plans and crowdfunding shareholders do not count toward this limit. Second, and far more important, employee investors want liquidity, and the most consistent method of achieving this is via an IPO.

So even though so-called decacorns like Snapchat are indeed opting to remain private for longer, hopefully we can all agree that a Snapchat IPO is essentially inevitable at some point.

A Snapchat IPO in 2017? 

So now that we have agreed that we can expect it to go public, the question then becomes, when will Snapchat hold its IPO? My guess is 2017.

To arrive at this estimate, I compared the relative price-to-sales ratio of Facebook and Twitter at the time of their IPOs against Snapchat's rumored 2016 P/S ratio range.

Data source: Author's calculations. (Snapchat revenue figure are 2016 estimates.) 

After running the numbers, we see that Snapchat simply looks too expensive at present to entice investors, if history bears any indication -- which it likely does, given the relatively cold climate for tech IPOs. In light of Snapchat's purported growth goals, though, next year should have the company in a P/S range more closely aligned with Facebook's and Twitter's when they went public.

Private investor presentations leaked to the public indicate Snapchat expects its 2017 sales to total between $500 million and $1 billion. Assuming Snapchat's valuation doesn't change, by no means a guarantee, Snapchat's price-to-sales ratio will lie somewhere in the range of 40 to 20, putting it easily in line with Facebook's and Twitter's pre-IPO valuations.

It's also worth noting that using Snapchat's price-to-sales ratio overlooks other key valuation metrics, such as growth and profitability. Case in point, Facebook was actually quite profitable on an absolute basis upon its IPO. And Twitter was still producing GAAP net losses upon its public debut. The pace of Snapchat's growth will also affect the price secondary market investors would be willing to pay for its shares as well; disproportionate growth to the upside or downside could expand or crimp its IPO valuation.

All this is conjecture, of course. So while Snapchat continues to expand its offerings in its pursuit of social media dominance, a Snapchat IPO seems at least a few more quarters away.