Ghostbusters Strategic Assessment and Valuation of Snap Inc. Master thesis Copenhagen Business School, 2018 Madeleine Ida Susanne Persson MSc in Accounting Strategy and Control Oscar Johan Eric Tydén Msc in Finance and Strategic Management Supervisor: Steen Rasmussen Pages: 116 Number of characters: 262,254 Hand in date: 15/05/2018 Executive summary This thesis aims to estimate the fair equity value of Snap Inc. as of December 31st, 2017. Founded in 2011, Snap is a US camera company. The company’s flagship product, Snapchat, is an application allowing people to communicate through short videos and photos called “snaps”. As of December 2017, the application had 187 million daily active users. The company serves two types of customers, (1) users and (2) advertisers. By developing features, Snap pursues to engage users to communicating through the platform. The engagement that follows attracts advertisers mainly in two ways. First by offering valuable Intel on targeted segments. Second, it offers the opportunity to spread information and interact with customers. Richer data and superior targeting capabilities as well as improved mobile infrastructure has made social media an effective channel for promotion. As a result, the market for advertisements on social media is expected to increase by 13.1% annually between 2016 and 2022 while the overall advertising market is expected to grow by 6% globally. Further, the network effect these platforms are built upon creates barrier to entry and as a result, there are a few platforms dominating the development. Overall, the outlook for the industry is largely positive. Supported by both secondary and primary data, through interviews and a questionnaire, the findings suggest that Snap has successfully managed to align their service with the preferences and needs of its targeted segment. Despite the network in itself is valuable for users, it is not sufficiently well positioned to outperform the peer average in terms of monetization. The lack of reciprocal communication between users and marketers as well as a more narrow brand exposure compared to Facebook makes the platform less attractive to the revenue-contributing group. Although, this paper suggest that Snap will improve its monetization and profitability, the concluding valuation suggest that the fair equity value is 27.8% below that of its reference date. Altogether, despite an overall optimistic view of the industry and the company, the traded valuation implies an over-confidence in the company’s future ability to generate value. Lastly, the paper recommend other authors to test conventional as well as network- specific multiples, potentially using network-based companies beyond solely social media actors, to test if DAU is becoming a better determinant of traded values compared to traditional multiple metrics. 1 Contents 1.0 Introduction ............................................................................................................................... 7 1.1 Research question formulation ..................................................................................................... 8 2.0 Methodology and study design ......................................................................................................... 8 2.1 Study approach............................................................................................................................ 8 2.2 Time period & delimitations ......................................................................................................... 9 2.3 Data collection ............................................................................................................................. 9 2.3.1 Semi-structured interview ...................................................................................................... 9 2.3.2 Survey ................................................................................................................................. 11 2.4 Validity and Reliability .............................................................................................................. 12 2.5 Limitations ........................................................................................................................... 13 3.0 Literature review ........................................................................................................................... 14 3.1 Models and theoretical framework ............................................................................................. 14 3.1.1 Strategic Analysis ................................................................................................................ 14 3.1.2 Financial analysis ................................................................................................................ 19 3.1.3 Valuation............................................................................................................................. 20 3.1.4 Selected topics ......................................................................................................................... 22 3.3 Analytical framework ................................................................................................................ 24 4.0 Snap ............................................................................................................................................. 26 4.1 Product offering ......................................................................................................................... 26 4.2 User development and average revenue per user ......................................................................... 28 4.3 Organization .............................................................................................................................. 29 4.4 Ownership structure .................................................................................................................. 30 4.5 Major Historical Events ............................................................................................................. 31 4.6 Strategy ..................................................................................................................................... 32 5.0 Strategic analysis ........................................................................................................................... 34 5.1 Competitors ............................................................................................................................... 34 5.1.1 Types of competing networks ............................................................................................... 34 5.1.2 Overview of selected network competitors ............................................................................ 34 5.1.3 Presentation of empirical findings from survey ..................................................................... 36 5.2 Macro ........................................................................................................................................ 41 5.2.1 Political ............................................................................................................................... 41 2 5.2.2 Legal ................................................................................................................................... 43 5.2.3 Economical factors............................................................................................................... 47 5.2.4 Social .................................................................................................................................. 48 5.2.5 Technological: ..................................................................................................................... 50 5.3 Industry .................................................................................................................................... 53 5.3.1 Buyer power ........................................................................................................................ 53 5.3.2 Supplier power .................................................................................................................... 56 5.3.3 Threat of Substitutes ............................................................................................................ 58 5.3.4 Threat of New Entry ............................................................................................................ 60 5.3.5 Rivalry among competitors .................................................................................................. 62 5.4 Internal ..................................................................................................................................... 63 5.4.1 Management and Board of directors ..................................................................................... 63 5.4.2 Product ............................................................................................................................... 65 5.4.3 User positioning ................................................................................................................... 67 5.4.4 Workforce ........................................................................................................................... 68 6.0 Financial analysis .......................................................................................................................... 70 6.1 Peer selection ............................................................................................................................