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9-218-095
REV: APRIL 19, 2021

MARCO DI MAGGIO

BENJAMIN C. ESTY

GREGORY SALDUTTE

Valuing Snap After the IPO Quiet Period (A)

On March 2, 2017, Snap Inc., the disappearing message app, went public at $17.00 per share on the
New York Stock Exchange (NYSE). According to The Wall Street Journal, “investors clamored for a piece
of the fast-growing social network,” causing the price to surge and eventually close at $24.48, up 44%
on the day. 1 At that price, the firm had a market capitalization of $34 billion and its two 20-something
founders, Bobby Murphy and Evan Spiegel, became the youngest self-made billionaires in the country
to own a public company. 2 Over the next three weeks, Snap traded as low as $19 and as high as $27,
and closed at $22.74 on Friday, March 24. During this time, 16 analysts made investment
recommendations on Snap: two with buy recommendations, seven with holds, and seven with sells.

Analysts at firms that served as underwriters of Snap’s initial public offering (IPO), including
Morgan Stanley and Goldman Sachs (the lead underwriters), were forbidden from issuing reports on
Snap until 25 days after the IPO according to Securities and Exchange Commission (SEC) rules. a When
the “IPO quiet period” ended on Monday, March 27, 14 more firms issued reports with
recommendations—ten with buy recommendations and four with holds—with price targets ranging
from $21 to $31. Brian Nowak, Morgan Stanley’s internet analyst, had a price target of $28 and an
overweight recommendation. He said, “We are bullish on Snap’s ability to monetize its highly engaged
daily active user (DAU) base.” 3

As she sat at her desk, Elizabeth Kemp scanned the reports searching for insights. Kemp was the
portfolio manager of a $400 million long-only, technology fund at Sand Hill Road Capital, and had
bought 500,000 Snap shares at the IPO. With a gain of almost $3 million (= ($22.74 - $17.00) * 500K
shares), she was inclined to buy more. But she recalled seeing a report written on March 14 by Kip
Paulson, Cantor Fitzgerald’s internet analyst with a price target of $18.00 and an underweight (sell)
recommendation based on concerns about Snap’s unproven business model, untested management
team, slowing growth, and fierce competition from larger rivals like Facebook/Instagram and Twitter. 4

a Although the SEC and FINRA had reduced the quiet period from 25 days to 10 days in 2015, underwriters still followed the
25-day rule because of prospectus delivery regulations (i.e., the prospectus had to be available to investors as the only official
source of company information for 25 days after the IPO). See “Equity Research,” FINRA Regulatory Notice 15-20, August
2015, pp. 5-6. Available at: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-30.pdf.

Professors Marco Di Maggio and Benjamin C. Esty and Research Associate Gregory Saldutte prepared this case. This case was developed from
published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. Elizabeth Kemp
and Sand Hill Road Capital are fictional. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2018, 2021 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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218-095 Valuing Snap After the IPO Quiet Period (A)

As a relatively new portfolio manager with a good three-year track record, Kemp wondered if now
was the time to harvest her gain or double down and buy more shares.

Company Background
Evan Spiegel met Bobby Murphy and Reggie Brown when they were undergraduate students at
Stanford University. 5 They created a disappearing picture app in 2011 called Picaboo with Spiegel
serving as the chief executive officer, Murphy as the chief technology officer, and Brown as the chief
marketing officer. 6 Soon thereafter, Brown left the company, the founders changed the name to
Snapchat, and they moved the operations to Los Angeles. Their app enabled users to send self-deleting
images, called “snaps,” to other users. Within a few years, users could also send videos and could retain
postings using the “my story” feature (see Exhibit 1 for a description of the app). 7

In 2016, the founders once again changed the name, this time to Snap Inc. The firm’s chief strategy
officer, Imran Khan, explained why: “[W]e are bigger than just one app…[W]e believe that reinventing
the camera represents our greatest opportunity to improve the way people live and communicate. Our
products empower people to express themselves, live in the moment, learn about the world, and have
fun together.” 8 The founders described the strategy—a kind of virtuous cycle—this way: “Our strategy
is to invest in product innovation and take risks to improve our camera platform. We do this in an effort
to drive user engagement, which we can then monetize through advertising. We use the revenue we
generate to fund future product innovation to grow our business.” 9

The firm’s advertising revenue could be measured by the number of daily average users (DAU)
times the average revenue per user (ARPU). At the end of 2016, it had advertising revenue of $378
million based on 158 million DAU’s and an annual ARPU of $2.39. Morgan Stanley’s Nowak predicted
Snap would have revenue of $4.9 billion by 2020, based on 236 million DAU’s and an ARPU of $20.72.
Exhibit 2 shows Nowak’s revenue forecasts for 2016 and 2020. To illustrate Snap’s growth potential,
Nowak compared Snap against three other social media companies—Instagram, Facebook, and Twitter
(see Exhibit 3). Although Snap’s current ARPU was considerably less than its peers primarily due to
its low “ad load” (advertisements per DAU per hour), Nowak predicted Snap would increase its ad
load by more than 10 times over the next four years.

In 2016, Snap generated revenues of $405 million and a loss of $515 million. The good news,
however, was that it had grown revenues by almost 600% while increasing losses by only 38% (see
Exhibit 4). In fact, quarterly analysis showed growth in both DAUs and ARPU over the last three years
(see Exhibit 5). To fund its growth, Snap raised $1.8 billion of equity in 2016 from a group of venture
capital firms. 10 Having raised eight rounds of equity capital totaling $2.6 billion, 11 Snap’s balance sheet
was entirely debt-free (see Exhibit 6). Nevertheless, the finance team had lined up a $1.1 billion
unsecured revolving credit facility in July 2016, from a syndicate of lenders including Morgan Stanley,
Goldman Sachs, Deutsche Bank, and Credit Suisse. 12 In terms of control, the firm had three classes of
common stock, two of which had voting rights (Classes B and C) and one of which did not (Class A).

The IPO
In October 2016, Snap chose Morgan Stanley and Goldman Sachs to be the lead underwriters for an
IPO scheduled for early 2017. 13 Underwriters performed many roles: they conducted due diligence on
the firm and its financial condition; helped write and file documents needed to issue public equity;
created a syndicate of other brokerage firms to distribute the shares; and contacted prospective
investors to gauge interest in the offering and to determine an offering price. Following the IPO, the
underwriters often bought shares to stabilize the price and provided research coverage for clients. 14

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Valuing Snap After the IPO Quiet Period (A) 218-095

For these services, the Snap underwriters—a collection of 26 brokerage firms—would get a fee of 2.5%
of the amount raised in the offering. 15 The stated purpose of the offering was to increase the firm’s
capitalization and enhance its financial flexibility. 16

In February 2017, Snap announced that it would sell 145 million new Class A non-voting common
shares, and existing shareholders would sell another 55 million Class A shares. 17 Spiegel and Murphy
each planned to sell 16 million Class A shares. 18 Nevertheless, they would still control 89% of the voting
rights following the IPO because they owned the majority of the Class B and C shares. 19 In total, there
would be 1.4 billion (fully diluted) shares outstanding after the offering. While it was becoming more
common to issue shares with limited voting rights, this was the first IPO on a US exchange of a stock
with no voting rights. 20

Besides the absence of voting rights, analysts raised three other concerns about the offering. First,
the price seemed high. Whereas Facebook, Twitter, Alphabet and Yelp traded at an average of 4.5
times 2018 revenues (enterprise value), Snap would trade at 13.9 times expected 2018 revenues
according Paulson at Cantor Fitzgerald. 21 Second, it had strong competitors—Facebook/Instagram,
Google/YouTube, and Twitter—all vying for the same digital advertising dollars. 22 And third, Snap
relied on powerful suppliers: it had recently signed long-term contracts worth $3 billion with Google
Cloud and Amazon Web Services to provide computing, storage, bandwidth, and other services. 23

Despite these concerns, Snap closed up 44% at $24.48 on its first day of trading. Because the offering
was oversubscribed by 10 times, 24 the underwriters exercised their “greenshoe” or overallot-ment
option. This contractual provision in the underwriting agreement gave them the ability to sell an
additional 30 million Class A shares at the offering price and to collect additional underwriting fees. 25

The Analyst Quiet Period

During the next few weeks, “sell-side” analysts not involved with the underwriting process released
reports, some of which were very critical of the firm and its prospects (see Exhibit 7). b For example,
Paulson wrote, “The (valuation) numbers do not add up… The company has much work ahead to
prove that ROI [Return on Investment] is not only positive, but competitive with other platforms
chasing these ad dollars.” 26 Another analyst warned that, “Snap is highly risky and not for those who
want to sleep peacefully at night….” 27 Despite these concerns, Snap closed at $22.74 on Friday, March
24.

When the IPO quiet period expired on Monday, March 27, Snap’s underwriters issued a flurry of
reports. Exhibit 8 summarizes the recommendations and 12-month price targets for some of these
firms; Exhibit 9 summarizes valuation assumptions for the firms that valued Snap using discounted
cash flow (DCF) analysis. Like many of his peers, Nowak used DCF analysis to value Snap. He said:

“We prefer DCF-based valuation (the standard methodology across our coverage
universe) but think it is useful to look at [the] Snap valuation in multiple ways, to sanity
check our assumptions around our DCF…[W]e also support our PT [price target] with 4
additional valuation methodologies [e.g., FCF and EBITDA multiples]…” 28

b Whereas “sell-side” analysts worked at brokerage firms and provided clients with investment recommendations, “buy-side”
analysts worked at investment firms and make buy and sell recommendations to portfolio managers. See “What is the
difference between a buy-side and a sell-side analyst?” January 22, 2018, available at:
https://www.investopedia.com/ask/answers/difference-between-buy-side-analyst-and-sell-side-analyst/, accessed 4-13-18.

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218-095 Valuing Snap After the IPO Quiet Period (A)

To value Snap, Nowak forecast free cash flows for 10 years (including the terminal year), used a
discount rate (weighted average cost of capital or WACC) of 9.7%, and used a perpetual (terminal
value) growth rate of 3.5% (see Exhibit 10). As reference points, Exhibit 11 shows the WACC’s used
by Nowak to value other internet and social media firms. Based on his analysis, Nowak assigned a
price target of $28 per share and issued an overweight recommendation. 29 Exhibit 12 shows the
distribution of stock recommendations for all firms covered by Morgan Stanley and for its investment
banking clients. Nowak concluded his report by saying:

“Snap’s engaged/hard-to-reach millennial users and unique video offerings should

attract significant ad dollars …[I]nvestors may push back that [the] Snap valuation looks rich
at this multiple [price target equal to 19 times 2018 revenue per share] relative to the peer
group. However, we think this valuation is appropriate given the optionality for materially
higher monetization if Snap is able to deliver on user growth and advertising innovation.” 30
Because investment bankers at Morgan Stanley had been underwriters for the Snap IPO, Nowak was
required to include a disclosure statement on the first page of his report (see Note 2 in Exhibit 10). Later
in the report, he disclosed the fact that Morgan Stanley had a “significant financial interest in the debt
securities of…Snap Inc. [through the credit facility]” 31 Disclosures regarding possible conflicts of interest
had been mandated by the SEC following a $1.4 billion settlement with 10 brokerage firms, including
Morgan Stanley, in 2003. 32 The settlement also required firms to separate investment banking (corporate
advisory and capital raising) from equity research both physically and operationally (i.e., to create a
proverbial “Chinese wall” between the two groups and to ensure analyst compensation was not tied to
banking fees). The intent was to prevent people from exchanging non-public information and to ensure
stock recommendations were not “tainted by efforts to obtain investment banking fees.” 33 Nowak’s
disclosures were also bound by Morgan Stanley’s Code of Conduct which required employees to “put
clients first” and to avoid conflicts of interest (see Note 3 in Exhibit 10).
Like Nowak, equity analysts at other firms were equally bullish on Snap. They said:
RBC Capital: “Snap has become an innovation leader—for both consumers and
advertisers—in arguably the single fastest [growing] advertising medium today—
Mobile…We believe that if it sustains its current level of innovation, it can sustain
premium growth for a long time and scale to profitability.” 34
Jefferies: “We believe Snap has all the ingredients to build a robust advertising business.
Snap has a large audience (158MM DAUs), deep engagement, and robust data about its
users…[and] should scale its business without significant capex investment.” 35
Deutsche Bank: “[We] see an attractive opportunity to buy the next great mobile ad
business amidst a sea of investor skepticism…Competitive risks, while real, are
overblown...” 36
Credit Suisse: “[W]e enthusiastically underwrite [Snap because] it is a scarce asset that
offers advertisers access to a coveted younger demographic…” 37

Conclusion
Elizabeth Kemp sat at her desk wondering what to do. With so many new buy recommendations,
Snap seemed poised for further price appreciation. Yet a few analysts remained skeptical. Having
already made a good return on her investment, she wondered if now was the time to harvest her gains
or to double down and buy more shares. As she pondered what to do, she recalled her experience with
GoPro’s IPO in the summer of 2014: she bought shares at $24 and it closed up 30% on the first day of

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 For the exclusive use of J. Zhang, 2022.

Valuing Snap After the IPO Quiet Period (A) 218-095

trading. After the quiet period expired, she sold all of her shares, in part because of the tepid ratings
from analysts affiliated with the underwriters, only to see the price increase to $80 within three
months. 38 Along with this painful memory, she recalled a quotation attributed to Warren Buffett:
“What we learn from history is that people don’t learn from history. When investors get too fearful or
too greedy, they sometimes hide behind the notion that ‘this time is different.’ Usually they regret it.” 39

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 For the exclusive use of J. Zhang, 2022.

218-095 Valuing Snap After the IPO Quiet Period (A)

Exhibit 1 Snapchat App Overview

Source: Snap Inc., SEC Registration Statement, Form S-1, 2/2/17, p. 92.

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 For the exclusive use of J. Zhang, 2022.

Valuing Snap After the IPO Quiet Period (A) 218-095

Exhibit 2 Snap Advertising Revenue Model, 2016 Actual vs. 2020 Expected

Snap Advertising Revenue Model 2016 2020E Notes

Daily Average Users (DAU, in millions) 158 236 User Base grows at 11% CAGR
X Hours per DAU per Day 0.42 0.50
X Ads per DAU per Hour 0.6 7.9 Snap continues to grow ad load
X Average Pricing ($ per 1K impressions) $26.00 $14.37 Inventory scales and pricing falls
X 365 Days per Year 365 365
Advertising Revenue ($ mil) $378 $4,889 Ad revenue grows at a 87% CAGR
Avg. Revenue per DAU (ARPU) $2.39 $20.72

Source: Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Exhibit 6 (p. 7), Morgan Stanley
Research, 3/27/18.

Exhibit 3 Snap Advertising Revenue Model vs. Comparable Internet Firms in 2016

2016 Advertising Revenue Drivers Snap Instagram Facebook Twitter

Daily Average Users (DAU, in millions) 158 345 1,227 129

X Hours per DAU per Day 0.42 0.36 0.58 0.15
X Ads per DAU per Hour 0.6 6.6 48.6 104.3
X Average Pricing ($ per 1K impressions) $26 $6 $2 $3
X 365 Days per Year 365 365 365 365
Advertising Revenue ($ mil) $378 $1,795 $25,118 $2,254
Avg. Revenue per DAU (ARPU) $2.39 $5.20 $20.47 $17.47

Source: Casewriter estimates using Exhibit 5 (p. 7) in B. Nowak et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst
report Exhibit 5 (p. 7), Morgan Stanley Research, 3/27/18.

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 For the exclusive use of J. Zhang, 2022.

218-095 Valuing Snap After the IPO Quiet Period (A)

Exhibit 4 Snap Inc. Income Statement ($ millions)

2015 2016

Revenue $58.7 $404.5

Costs and Expenses
Cost of Revenue $182.3 $451.7
Research and Development $82.2 $183.7
Sales and Marketing $27.2 $124.4
General and Administrative $148.6 $165.2
Total Costs and Expenses $440.4 $924.9

Loss From Operations ($381.7) ($520.4)

Net Interest Income $1.4 $3.3
Other Income (Expense), net ($0.2) ($4.6)
Loss Before Income Taxes ($380.5) ($521.7)
Income Tax Benefit (Expense) $7.6 $7.1
Net loss ($372.9) ($514.6)

Source: Snap Inc. SEC Registration Statement, Form S-1, 2/2/17, p. 57.

Exhibit 5 Snap Inc. Quarterly Financial and Operating Statistics

Quarterly Average (millions and dollars)

Daily Global N. America
Active Avg. Rev. Avg. Rev. Financial Data ($ millions)
Users Growth Per User Growth Per User Cost of Operating Gross
(DAU) in DAU (ARPU) in ARPU (ARPU) Revenue Revenue Loss Margin

4Q16 158 3% $1.05 25% $2.15 $165.7 $153.4 ($169.7) 7.4%

3Q 153 7% $0.84 68% $1.76 $128.2 $127.8 ($131.0) 0.3%
2Q 143 17% $0.50 56% $1.06 $71.8 $94.8 ($115.9) (32.0%)
1Q 122 14% $0.32 3% $0.67 $38.8 $75.8 ($103.8) (95.4%)
4Q15 107 14% $0.31 72% $0.65 $32.7 $64.8 ($98.2) (98.2%)
3Q 94 9% $0.18 200% $0.36 $16.7 $56.2 ($96.9)
2Q 86 8% $0.06 20% $0.13 $5.3 $40.6 ($87.8)
1Q 80 13% $0.05 $0.10 $3.9 $20.7 ($98.8)
4Q14 71 15%
3Q 62 9%
2Q 57 24%
1Q 46

Source: Snap Inc. SEC Registration Statement, Form S-1, 2/2/17, pp. 62, 64, and 76.

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Valuing Snap After the IPO Quiet Period (A) 218-095

Exhibit 6 Snap Inc. Balance Sheet ($ millions)

2015 2016

Assets
Current Assets
Cash & Securities $640.8 $987.3
Accounts Rec. $44.3 $162.7
Prepaid Expenses $7.4 $30.0
Total Current Assets $692.6 $1,180.0
Property and Equipment, net $44.1 $100.6
Goodwill and Intangibles $177.1 $395.1
Other Assets $25.1 $47.1
Total Assets $938.9 $1,722.8

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable $0.7 $8.4
Accrued exp. and other CL $155.6 $148.3
Total Current Liabilities $156.3 $156.7
Other liabilities $18.5 $47.1
Total Liabilities $174.8 $203.9
Stockholders' Equity $764.1 $1,518.9
Total Liab. & Shareholders' Equity $938.9 $1,722.8

Source: Snap Inc. SEC Registration Statement, Form S-1, 2/2/17, p. F-3.

Exhibit 7 Summary of Sell-Side Equity Analyst Ratings for Snap Inc. in March 2017

Average Average
Analyst Ratings in Existence on Each Date Rating Price
Date Buy Hold Sell Total (Note a) Target

March 2 0 2 1 3 2.0 $16.00

March 16 0 6 4 10 1.9 $17.50
March 26 2 7 7 16 2.5 $19.83
March 27 12 11 7 30 3.4 $23.56

Source: Bloomberg, accessed 3/19/18.

Note (a): Numerical ratings: 1 = sell, 2 = underweight, 3 = neutral, 4 = overweight, and 5 = buy.

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218-095 Valuing Snap After the IPO Quiet Period (A)

Exhibit 8 Summary of Equity Analyst Recommendations and Analysis of Snap Inc., March 2017

Under- Analyst
Report Writer Price Recom-
Analyst Firm & Role Date Share Target mendation

Independent Firms
Morningstar Equity 1-Mar-17 none $15.00 n/a
Aegis Capital 2-Mar-17 none $22.00 Hold
Nomura Instinet 2-Mar-17 none $16.00 Reduce
Pivotal Research 2-Mar-17 none $10.00 Sell
Atlantic Equities 3-Mar-17 none $14.00 Underweight
Susquehanna 3-Mar-17 none $22.00 Neutral
FBN Securities 9-Mar-17 none $23.00 Perform
Cantor Fitzgerald 14-Mar-17 none $18.00 Underweight
Moffett Nathanson 16-Mar-17 none $15.00 Sell
Mizuho Securities 17-Mar-17 none $20.00 Neutral
Monness Crespi 20-Mar-17 none $25.00 Buy
Drexel Hamilton 21-Mar-17 none $30.00 Buy
Piper Jaffray 22-Mar-17 none $23.00 Neutral
Needham & Co. 22-Mar-17 none n/a Underperform
Summit Redstone 26-Mar-17 none $17.00 Sell
B of A/Merrill n/a none n/a Neutral
BMO Capital n/a none n/a Perform

Lead Underwriters
Morgan Stanley 27-Mar-18 30.2% $28.00 Buy
Goldman Sachs 27-Mar-18 24.8% $27.00 Buy
Lead Managers (Book Runners)
JP Morgan 27-Mar-17 13.3% $24.00 Neutral
Deutsche Bank 27-Mar-17 10.0% $30.00 Buy
Allen & Co. No research 7.0% n/a
Barclays No report 6.0% n/a
Credit Suisse 27-Mar-17 3.1% $30.00 Outperform
Other Underwriters (Co-Managers)
Citibank 27-Mar-17 0.6% $27.00 Buy
Cowen & Co. 27-Mar-17 0.5% $26.00 Outperform
Jefferies 27-Mar-17 0.3% $30.00 Buy
JMP Securities 27-Mar-17 0.2% $28.00 Outperform
Oppenheimber 27-Mar-17 0.3% $21-$26 Perform
RBC Capital 27-Mar-17 0.6% $31.00 Outperform
Stifel, Nicolaus 27-Mar-17 0.5% $24.00 Hold
UBS 27-Mar-17 0.6% $24.00 Neutral
William Blair 27-Mar-17 0.2% $25-$28 Outperform

Source: Casewriter analysis of individual equity research reports on Snap Inc. from each firm, available on ThompsonOne,
accessed 3/18/18. Certain data comes from public news articles about the IPO. Underwriter status was from:
Balakrishnan, A., “Here’s What Snap’s Wall Street Underwriters Made Off the IPO,” CNBC, 3/3/17, available at:
https://www.cnbc.com/2017/03/03/snap-ipo-what-wall-street-banks-made.html, accessed 3/18/18.

10

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Valuing Snap After the IPO Quiet Period (A) 218-095

Exhibit 9 Summary of Analyst Assumptions and Forecasts for Snap in 2020 (see Note 1 below)

Discount TV Analyst Forecast for 2020

Analyst(s) Price Rate Growth Free Cash
From Report Date Target WACC Rate Revenue DAU ARPU Flow (FCF)

Independent Firms
Pivotal 2-Mar-17 $10 12.0% 6.0% $3,863 n/a n/a ($178)
Aegis Capital 2-Mar-17 $22 13.4% 3.0% $4,500 250 n/a $605
Susquehanna 3-Mar-17 $22 n/a n/a n/a 280 $21.24 $357
FBN 9-Mar-17 $23 10.3% 4.5% $4,816 369 $14.09 ($592)
Cantor 14-Mar-17 $18 12.0% 4.0% $6,248 346 $18.92 $398
Piper Jaffray 22-Mar-17 $23 10.7% (2.0%) $6,396 289 $22.41 $253

Lead Underwriter
Morgan Stanley 27-Mar-17 $28 9.7% 3.5% $4,902 236 $20.72 ($243)
Lead Managers
JP Morgan 27-Mar-17 $24 13.0% 3.5% $6,808 299 $21.30 $1,026
Deutsche Bank 27-Mar-17 $30 15.7% n/a $5,126 272 $18.06 $1,275
Credit Suisse 27-Mar-17 $30 11.0% 3.0% $4,634 281 $17.02 $351
Other Underwriters
Cowen & Co 27-Mar-17 $26 10.0% n/a $5,204 289 $18.16 $351
JMP Securities 27-Mar-17 $28 15.0% n/a $4,965 n/a n/a $634
Oppenheimer 27-Mar-17 range n/a n/a $5,649 281 $18.89 $953
RBC Capital 27-Mar-17 $31 11.0% 5.0% $4,621 n/a n/a $391
UBS 27-Mar-17 $24 18.0% n/a $5,269 332 $16.70 $442
William Blair 27-Mar-17 range 10.0% n/a $4,654 n/a n/a n/a

Average $24.2 12.3% 3.4% $5,177 293.7 $18.86 $402

Median $24.0 11.5% 3.5% $4,965 285.1 $18.89 $391
Maximum $31.0 18.0% 6.0% $6,808 369.0 $22.41 $1,275
Minimum $10.0 9.7% (2.0%) $3,863 236.0 $14.09 ($592)
Standard Deviation $5.5 2.5% 2.2% $795 38.3 $2.44 $487
Coeff. of Variation (note 2) 0.23 0.20 0.66 0.15 0.13 0.13 1.21

Source: Individual equity research reports on Snap Inc. from each firm, available on ThompsonOne, accessed 3/18/18.

Note 1: Includes only firms that described using discounted cash flow (DCF) analysis to value Snap. Not all firms revealed all
of the information needed to conduct DCF analysis.

Note 2: The coefficient of variation is a unitless measure of dispersion. It is calculated by dividing the standard deviation of
the sample by the mean.

11

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 218-095 -12-

Exhibit 10 Morgan Stanley’s Cash Flow Forecasts and Valuation Assumptions for Snap Inc. ($ millions)

Actual Financial Forecast ($ millions)

Item 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 TV Year (2026)
Income Statement
Net Revenue $405 $944 $1,935 $3,254 $4,902 $6,907 $9,189 $11,635 $14,131 $16,569 $17,149
Growth 589.5% 133.3% 105.0% 68.2% 50.6% 40.9% 33.0% 26.6% 21.4% 17.3% 3.5%
Adj. EBITDA (Note 1) ($459) ($772) ($610) ($195) $363 $1,474 $2,616 $3,888 $5,223 $6,574 $6,804
Adj. EBITDA Margin (113.6%) (81.8%) (31.5%) (6.0%) 7.4% 21.3% 28.5% 33.4% 37.0% 39.7% 39.7%
Cash Flow Items
- Cash Taxes $0 $0 $0 $0 $0 $0 $0 $0 $823 $1,448
- Incr. (Decr.) in Net WC $151 $257 $228 $231 $228 $209 $224 $248 $207 $151
- Capital Expenditures $67 $83 $97 $109 $120 $130 $140 $148 $155 $161
- Stock-based Comp. $32 $75 $159 $203 $257 $317 $421 $533 $648 $759
Free Cash Flow ($709) ($1,186) ($1,093) ($737) ($243) $818 $1,831 $2,958 $3,390 $4,054 $4,196

Morgan Stanley Valuation Assumptions Market Data (March 27, 2017)

Cost of Debt 3.00% # Fully Diluted Shares (millions) 1,404 US Treasury Yields 27-Mar
Future Leverage (D/V) 2% Excess Cash ($ mil) $2,081 30-Year 3.06%
Tax Rate 35% 10-Year 2.38%
Cost of Equity 9.90% Perpetual Growth Rate 3.5%
Equity Risk Premium 5.59%
Stated WACC 9.7%

Source: Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Exhibit 13 (p. 11), Morgan Stanley Research, 3/27/17.

Note 1: Adjusted EBITDA is a non-GAAP item. It excludes stock-based compensation expense (a cash expense), but includes depreciation and amortization.

Note 2: Morgan Stanley Equity Research Disclosure: Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. (p. 1 of the Snap Inc. analyst report, 3/27/17).

Note 3: Morgan Stanley Code of Conduct: Our values inform everything we do: Putting Clients First, Leading with Exceptional Ideas, Doing the Right Thing and Giving Back. Our Code
of Conduct reflects our continued commitment to performing all our business activities in accordance with these core values and in full alignment with the letter and spritit
of applicable laws, regulations and our policies…. Putting Clients First requires us to place our clients’ interests first and avoid conflicts between their interests and ours.
Available at: https://www.morganstanley.com/about-us-governance/code-of-conduct, accessed 3/18/18.

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Valuing Snap After the IPO Quiet Period (A) 218-095

Exhibit 11 Assumptions Used by Morgan Stanley for Internet Stocks and Other Market Data

Financial Data on 12/31/16 ($mil)

Morgan Stanley Reports Equity Betas to 3/1/17 Debt at Equity at
Report 1 Year 2 Years Book Market
Company Date WACC Daily Weekly Cash Value Value

Snap Inc. 3/27/2018 9.7%

Alphabet 3/23/2017 8.0% 0.99 1.34 $12,918 $3,935 $539,070

Amazon 1/18/2017 7.5% 0.97 1.30 $19,334 $20,413 $356,313
eBay 1/19/2017 6.3% 1.31 1.38 $1,816 $8,960 $33,191
Etsy 3/1/2017 8.1% 1.57 2.32 $182 $12 $1,361
Facebook 2/2/2017 8.6% 0.86 1.12 $8,903 $0 $331,594
Groupon 2/16/2017 8.2% 1.95 2.08 $863 $228 $1,896
GrubHub 2/8/2017 8.5% 1.48 1.13 $240 $0 $3,220
LinkedIn (a) 4/29/2016 9.1% n/a n/a n/a n/a n/a
Priceline Group 2/28/2017 8.0% 1.45 1.33 $2,081 $7,169 $72,343
Twitter 2/9/2017 6.3% 0.91 1.71 $989 $1,687 $11,563
Yelp 11/3/2016 8.3% 1.63 1.46 $272 $0 $2,992
Zynga 1/19/2017 9.0% 1.18 1.22 $852 $0 $2,292

Average 8.0% 1.30 1.49

Median 8.2% 1.31 1.34

Source: Individual equity research reports for each firm by Morgan Stanley, available on ThompsonOne, accessed 3/30/18.
The betas and financial data are from Standard & Poor’s Capital IQ database, accessed 4/6/18.

Note (a): Because Microsoft acquired LinkedIn in late 2016, financial and trading data was not available.

Exhibit 12 Summary of Morgan Stanley Investment Ratings, March 2017

Coverage of
Coverage Universe Investment Banking (IB) IB Clients
(All Ratings) Clients as % of
Rating Category Count Percent Count Percent All Ratings

Overweight/Buy 1,148 35% 286 43% 25%

Equal-weight/Hold 1,418 43% 297 45% 21%
Not-Rated 61 2% 8 1% 13%
Underweight/Sell 638 20% 76 11% 12%
Total 3,265 100% 667 100%

Source: Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report p. 38, Morgan Stanley Research,
3/27/17.

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218-095 Valuing Snap After the IPO Quiet Period (A)

Appendix List of Equity Analyst Reports on Snap Inc. Used in this Case
Study
Anmuth, D., et al., “Strong Engagement & Monetization headroom; But Still Much to Prove at Current
Valuation; Initiating Neutral & $24 PT,” Snap Inc. Analyst Report, J. P. Morgan, 3/27/2017.

Anthony, V., “Rating: Not Rated. Breaking the Cold Snap! Initiating Pre-IPO with a $22 Fair Value,” Snap
Inc. Analyst Report, Aegis Capital Group, 2/27/2017.

Anthony, V., “Rating: Hold. Formally Establishing a Hold Rating,” Snap Inc. Analyst Report, Aegis
Capital Group, 3/2/2017.

Blackledge, J., et al., “Initiate SNAP at Outperform,” Snap Inc. Analyst Report, Cowen and Company,
3/27/2017.

Boone, R.V., & Josey, R.V., “Initiating Coverage at Market Outperform Rating & $28 Target: Benefiting
from Media Fragmentation as Engagement Grows,” Snap Inc. Analyst Report, JMP, 3/27/2017.

Fitzgerald, B., et al., “No Filter Needed – This Growth Picture Not Disappearing,” Snap Inc. Analyst
Report, Jefferies, 3/27/2017.

Helfstein, J., et al., “Redefining the Camera for the Mobile Era – Initiate with Perform on Valuation,” Snap
Inc. Analyst Report, Oppenheimer, 3/27/2017.

Ju, S., et al., “Weaving a Path out of the Experimental Budget Friend Zone,” Snap Inc. Analyst Report,
Credit Suisse, 3/27/2017.

Kemp, S. J., “Moats Matter Most in Matters of Mettle, Multiples, and Makin’ Money; Initiate at Neutral,”
Snap Inc. Analyst Report, PiperJaffray, 3/22/2017.

Mahaney, M., et al., “Snap Crackle Up: Initiating SNAP with Outperform & $31 PT,” Snap Inc. Analyst
Report, RBC Capital Markets, 3/27/2017.

Mogharabi, A., “Launching Coverage of Snap with no Economic Moat, Stable Moat Trend and a $15
FVE”, Snap Inc. Analyst Report, Morningstar, 3/1/2017.

Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. Analyst Report, Morgan Stanley
Research, 3/27/17.

Patil, S., “Snap Inc.: Initiating Coverage with a Neutral Rating and $22 Price Target,” Snap Inc. Analyst
Report, SIG, 3/3/2017.

Sandler, R., et al., “Swiping in Front of the Competition,” Snap Inc. Analyst Report, Barclays, 3/28/2017.

Schackart, R., et al., “Initiating Coverage with Outperform Rating,” Snap Inc. Analyst Report, William
Blair, 3/27/2017.

Seyrafi, S., “Initiating Coverage of Snap, Inc., Millenial Favorite and Innovation Leader, with a Sector
Perform Rating and $23 Price Target,” Snap Inc. Analyst Report, FBN Securities, 3/9/2017.

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Valuing Snap After the IPO Quiet Period (A) 218-095

Sheridan, E. J., et al., “Are Ghosts Real? – Initiating SNAP at Neutral,” Snap Inc. Analyst Report, UBS,
3/27/2017.

Squali, Y., et al., “Is SNAP the Next FB or the Next TWTR? Initiating with Underweight/$18 PT,” Snap
Inc. Analyst Report, Cantor Fitzgerald, 3/14/2017.

Stabler, P. et al., “SNAP: Initiating Coverage at Market Perform Shiny New Object, but Data Should
Dictate Staying Power,” Snap Inc. Analyst Report, Wells Fargo Securities, 3/31/2017.

Walmsley, L., et al., “Not Afraid of Ghosts; Initiate with Buy Rating and $30 TP,” Snap Inc. Analyst
Report, Deutsche Bank, 3/27/2017.

Wieser, B., “Snap Inc.: Can’t Get there from here. Initiating Coverage with SELL Rating and $10 Price
Target,” Snap Inc. Analyst Report, Pivotal, 3/2/2017.

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218-095 Valuing Snap After the IPO Quiet Period (A)

Endnotes

1 Farrell, M., et al., “Snapchat Shares Surge 44% in Market Debut,” The Wall Street Journal, 3/2/17, available at:
https://www.wsj.com/articles/snapchat-parent-snap-opens-higher-in-market-debut-1488471695, accessed 3/20/18.
2 Vinton, Kate, “$2.8 Billion on IPO Day, Forbes Magazine, 3/2/17, available at:
https://www.forbes.com/sites/katevinton/2017/03/02/snap-cofounders-fortunes-rise-a-combined-2-8-billion-on-ipo-
day/#6d0e4252653d, accessed 3/20/18.
3 Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report, Morgan Stanley Research, p. 1, 3/27/17.

4 Paulson, K., Y. Squali, and N. Khan, “Is Snap the Next FB or the Next TWTR?” Cantor Fitzgerald Equity Research, 3/14/17,
accessed on ThompsonOne 3/17/18, pp. 1, 4.
5 Andrew Nusca, “Snapchat: An Abridged History,” Fortune, February 5, 2017, http://fortune.com/2017/02/04/snapchat-
abridged-history/, accessed 11/16/17.
6 Andrew Nusca, “Snapchat: An Abridged History,” Fortune, February 5, 2017, http://fortune.com/2017/02/04/snapchat-
abridged-history/, accessed 11/16/17.
7 Snap, Inc., February 2, 2017 Form S-1 (filed February 2, 2017), pp. 8-9,
https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm, accessed November 2017.
8 Imhran Khan, Snap Inc. Chief Strategy Officer, quoted in, Lauren Johnson, “CSO Imran Khan Explains Snapchat’s Rebrand to
Snap Inc.,” ADWeek, September 26, 2016, http://www.adweek.com/digital/cso-imran-khan-explains-snapchat-s-rebrand-
snap-inc-173719/, accessed January 2018.
9 Snap, Inc., February 2, 2017 Form S-1 (filed February 2, 2017), p. 2, available at:
https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm, accessed 3/14/18.
10 Ingrid Lunden, “Snapchat Raised $1.8B In a Series F Round; Leaked Deck Reveals Revenues, User Numbers,”
Techcrunch.com, May 26, 2016, https://techchrunch.com/2016/05/26/snapchat-series-f/, accessed November 2017.
11 “Snap Inc. Funding History,” http://www.crunchbase.com/organization/snapchat/funding-rounds, accessed April 2018.

12 Snap, Inc., Prospectus, Initial Public Offering of Class A Common Stock, dated 3/1/17, available on SEC’s Edgar database,
available at: https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm, pp. 83-84, 178,
accessed 4/6/18.
13 Sruthi Ramakrishnan and Lauren Hirsch, “Snapchat picks Morgan Stanley, Goldman to lead IPO: sources,” Reuters, October
12, 2016, https://www.reuters.com/article/us-snapchat-ipo/snapchat-picks-morgan-stanley-goldman-to-lead-ipo-sources-
idUSKCN12C2FV, accessed April 2018.
14 Snap, Inc., Prospectus, initial public offering of Class A common stock, dated 3/1/17, available at:
https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm, p. 178, accessed 4/6/18.
15 Snap Inc., Prospectus, Initial Public Offering of Class A Common Stock, dated 3/1/17, available at:
https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm, p. 175, accessed 4/6/18.
16 Snap, Inc., February 2, 2017 Form S-1 (filed February 2, 2017),
https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm, p. 7, accessed November 2017.
17 Amendment No. 3 to Snap, Inc. Form S-1 (filed February 24, 2017)
https://www.sec.gov/Archives/edgar/data/1564408/000119312517056992/d270216ds1a.htm#rom270216_19, p. 8, accessed
November 2017.
18 Alex Heath, “Snap’s 2 cofounders will sell up to $512 million in stock when their company goes public in March,” Business
Insider, February 16, 2017, http://www.businessinsider.de/snapchats-evan-spiegel-and-bobby-murphy-to-sell-up-to-512-
million-in-stock-2017-2?r=US&IR=T, accessed April 2018.
19 Snap Inc., Prospectus, Initial Public Offering of Class A Common Stock, dated 3/1/17, available at:
https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm, p. 9, accessed 4/6/18.

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Valuing Snap After the IPO Quiet Period (A) 218-095

20 Snap Inc., Prospectus, Initial Public Offering of Class A Common Stock, dated 3/1/17, available at:
https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm, p. 6, accessed 4/6/18.
21 See Exhibit 2 on p. 3, assuming a $17 offer price. Snap, Inc., K. Paulson et al., Cantor Fitzgerald analyst report, 3/21/18,
available on ThompsonOne, accessed 3/17/18.
22 Snap, Inc., p. 4, K. Paulson et al., Cantor Fitzgerald analyst report, 3/14/17, available on ThompsonOne, accessed 3/17/18.

23 Snap, Inc., p. 13, K. Paulson et al., Cantor Fitzgerald analyst report, 3/14/17, available on ThompsonOne, accessed 3/17/18.

24 Lauren Hirsch, “Snap’s shares pop after year’s biggest IPO,” Reuters, March, 2, 2017, https://www.reuters.com/article/us-
snap-ipo/snaps-shares-pop-after-years-biggest-ipo-idUSKBN1690I7, accessed May 2018.
25 Amendment No. 3 to Snap, Inc. Form S-1 (filed February 24, 2017),
https://www.sec.gov/Archive/edgar/data/1564408/000119312517056992/d270216ds1a.htm#rom270216_19, p. 176, accessed
November 2017.
26 Paulson, K., et al., “Is SNAP the Next FB or the Next TWTR?” Cantor Fitzgerald analyst report, 3/21/18, available on
ThompsonOne, accessed 3/17/18, p. 4.
27 Kees, J., and S. Nandury, “Snap Inc.: Say Cheese! Taking a Cautious View on a ‘Camera Company,’” Summit Redstone
Partners analyst report, 3/26/17, available on ThompsonOne, accessed 3/17/18, p. 9.
28 Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Morgan Stanley Research, pp. 2, 28,
3/27/17.
29 Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Morgan Stanley Research, p. 2, 3/27/17.

30 Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Morgan Stanley Research, pp. 1, 11,
3/27/17.
31 Nowak, B., et al., “Crackle or Pop? Initiate OW, $28 PT,” Snap Inc. analyst report Morgan Stanley Research, p. 41, 3/27/17.

32Securities and Exchange Commission, “Ten of Nation’s Top Investment Firms Settle Enforcement Actions Involving
Conflicts of Interest Between Research and Investment Banking, Release #2003-54, 4/28/03, available at:
https://www.sec.gov/news/press/2003-54.htm, p. 2, accessed 4/19/18.
33 Securities and Exchange Commission, “Ten of Nation’s Top Investment Firms Settle Enforcement Actions Involving
Conflicts of Interest Between Research and Investment Banking, Release #2003-54, 4/28/03, available at:
https://www.sec.gov/news/press/2003-54.htm, p. 3, accessed 4/19/18.
34 Mahaney, M., et al., “Snap Crackle Up: Initiating SNAP with Outperform & $31 PT,” Snap Inc., RBC Capital analyst report,
3/27/2017, available on ThompsonOne, accessed 3/17/18, p. 1.
35 Fitzgerald, B., et al., “No Filter Needed – This Growth Picture Not Disappearing,” Snap Inc., Jefferies analyst report,
3/27/2017, available on ThompsonOne, accessed 3/17/18, p. 1.
36 Walmsley, L., et al., “Not Afraid of Ghosts; Initiate with Buy Rating and $30 TP,” Snap Inc., Deutsche Bank analyst report,
3/27/2017, available on ThompsonOne, accessed 3/17/18, p. 1
37 Ju, S., et al., “Weaving a Path out of the Experimental Budget Friend Zone,” Snap Inc., Credit Suisse analyst report,
3/27/2017, available on ThompsonOne, accessed 3/17/18, p. 1.
38 Ogg, J.C., “GoPro Stock Defies Weak Analyst Ratings After Quiet Period Expiration, 24/7 Wall St. blog, available at:
https://247wallst.com/consumer-products/2014/07/21/analysts-taking-mixed-views-in-gopro-ratings-initiations/, accessed
5/4/18.
39 Merriman, P.A., “The genius of Warren Buffett in 23 Quotes,” MarketWatch, 8/19/15, available at:
https://www.marketwatch.com/story/the-genius-of-warren-buffett-in-23-quotes-2015-08-19, accessed 4/20/18. The stock
price data is from Thompson Reuters Datastream, accessed 5/1/18.

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