Snap Inc. Draws More Similarities to Twitter than Facebook
Snap Inc.’s (NYSE: SNAP) initial public offering is so far one of the higher profile IPOs in 2017. Much of the attention is focused on the equity valuation of the company and its potential growth over the coming years, as well as what it means for future technology IPOs. However, in this blog, we will focus on an alternative perspective, namely, what is the credit quality of this company, and where might it be headed in the future? While Snap does not have publicly available debt, anyone with a stake in the firm who believes in Snap’s growth potential must also consider the downside risk that credit analysis provides. Certainly, those providing Snapchat’s parent with a $1.2bn revolving credit facility would have an interest in the company’s ability to pay back that amount if it were drawn down.
We compared Snap to several other high profile tech IPOs in recent years to see how they compared and if there were any potential implications for the firms. Specifically, we compared Snap to Yelp, Twitter, and Facebook during the period of their IPOs and in subsequent quarters.
Snap’s Credit Model Score
We undertake this analysis by utilizing our credit scoring model, CreditModel, which is an advanced statistical model by S&P Global Market Intelligence designed to generate a quantitative credit score that approximates a credit rating by S&P Global Ratings. When scoring Snap, we calculate that the firm has an implied credit score of ‘b’.
Snap’s credit score denotes elevated credit risk, more specifically, it would equate to a 4.45% observed default rate over a one year period, or nearly a 1 in 20 occurrence of default. To put that into perspective, Snap’s credit score is more risky than the median level of risk in the Application Software industry, which is ‘b+.’
As a result of the analysis, we see Snap’s credit peers are Yelp and Twitter, as each of these firms had similar credit quality pre-IPO. Once public, the cash infusion from the IPO provided a short term credit boost, increasing their credit scores immediately, and then ongoing improvements in financial performance continued this increase in subsequent quarters. For example, for Twitter, this occurred as assets rose from $1bn to $3.4bn after the IPO, and the contribution to overall risk for this risk factor dropped from 33% to 17% as the credit score improved. If Snap were to follow a similar pattern, their credit health could improve over the coming quarters and buoy their longer term prospects from a financial health point of view.