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  1. Home
  2. / Investing
  3. / Technology

Snapchat Growing Faster Than Facebook Did

But there are some who say it can't last.
By ERIC JACKSON Mar 09, 2016 | 07:30 AM EST
Stocks quotes in this article: FB, TWTR, MSFT, FOXA

Re/Code published a story Monday about how quickly Snapchat is growing.

The story said Snapchat would do at least $300 million in revenues this year, and possibly up to $350 million. The company estimates it had $50 million in revenues in 2015.

Keep in mind that Snapchat didn't generate any revenues when 2014 began. The company was founded in 2011, when CEO Evan Spiegel was still at Stanford.

Going from $50 million in revenues last year to potentially $350 million in revenues this year is a historically impressive jump. To place it in context, recall that Facebook (FB) went from $153 million in revenues in 2007 to $272 million in revenues in 2008. Snapchat is growing its revenues at a 7x clip vs. Facebook's 78% growth rate at a similar size/age.

Yet Snapchat recently closed a flat round of private financing done at a $16 billion valuation. There were some who said Snapchat is still too expensive. They think tech unicorns are due for some comeuppance. When you look at Snapchat relative to Facebook, though, Snapchat is actually cheaper at this point in its development.

Recall that Microsoft (MSFT) invested $240 million in Facebook in October 2007 at a $15 billion valuation. So Snapchat and Facebook share similar valuations for their age/stage of development, and they're currently around the same size in terms of revenues (the Re/Code story said Snapchat got to a $100 million "run rate" in the fourth quarter of last year) but Snapchat is growing much faster.

It's fair to argue that Snapchat's investors are getting a more favorable valuation than Microsoft did, because Snapchat should be much bigger, much faster.

If Snapchat follows the Facebook path, its future revenue growth should be even more impressive. Microsoft went from $272 million in revenues in 2008 to $777 million in 2009 (what recession?), $2 billion in 2010 and $3.7 billion in 2011. Those are growth rates of 3x, 2.5x and nearly 2x, respectively.

If Snapchat is growing at 7x year over year now, it's not unreasonable to expect a similar ramp as Facebook saw, with of course a declining rate of growth each year.

Critics will point out two cautionary tales in response to this argument: MySpace and Twitter (TWTR).

Even though it's over a decade since Fox (FOXA) bought MySpace for less than $600 million, social media stock critics like to use MySpace as an example of how fickle users, advertisers and investors can be. Easy come, easy go is their argument for how the roof could fall in on Snapchat. This argument didn't apply to Facebook, of course.

Twitter was widely compared to Facebook. Expectations were so high that Twitter would experience the same kind of acceleration in revenues and users that Facebook did post-IPO. It didn't happen. There were signs before the IPO that growth for Twitter was not as supernova-like as it was for Facebook. Investors hoped there would still be a ramp. They didn't expect a flat line. (Facebook and Twitter are part of TheStreet's Action Alerts PLUS portfolio.)

The growth Snapchat is going through (rumored, because there are obviously no filings yet) is supernova-like -- to the point that it's more supernova-like than Facebook was. So while a slowdown could come, it certainly appears to be on a much better and higher trajectory than Twitter was.

All systems are go for Snapchat to experience super-large growth over the coming years.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Jackson had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Technology | Stocks

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