In February 2021, Peter Sellis, obscure product manager at Snapchat, announced during an investor presentation that Snapchat had "years of growth greater than 50% ahead of it." The stock price, already high, was soaring. And this euphoria was reflected in the research notes of analysts. Here is my exchange with one of these analysts at the time.

Me : "Hi, I'm a new client of your research. Regarding your price target on Snapchat of $80, which corresponds to a market capitalization of $120 billion, could you explain to me in more detail the reasoning behind this number? Indeed, I only found on the method this sentence in your note: "We value Snap based on an average sales multiple and compare its valuation to comparable companies."
I understand that a sales multiple can be used* to value a company that is not yet generating earnings**. But, to give you an example, you could pay Microsoft up to 8 times its sales in 2000 and get a good return on investment over the next decade. But the notable difference is that Microsoft's operating margin at that time was 50%. Snapchat is now generating losses, will never reach that kind of level and your model is 22 times future sales.
Finally, regarding "comparable companies", if the comparables are valued on the same principle then the bubble reinforces the bubble. So I find this argument unconvincing.
What are your thoughts on this subject? Thank you. Charles "

Analyst "Hi Charles, lots to discuss here, but I'll do my best to answer the big questions. You are paying a high multiple for growth and margins these days. SNAP's growth is over 50%. Margins will grow as monetization increases. We are just at a tipping point and are seeing the first signs of operational leverage as advertisers come on board.
The $80 price target is 12 months out which is effectively 20x 2022 sales. Our valuation assumptions are ambitious and based on the current market valuation for these high-growth companies. The scenario carries risk if market sentiment changes on the sector. But the company is also outperforming most of its peers, and I am much more comfortable underwriting 40%+ growth for the next five years on Snapchat than lower growth rates for some of its competitors. Revenue momentum is driving the stock and as margins materialize, the story is attractive over a five-year horizon."

Me : "Thanks for the explanation. However I see that after the Q3^Th 2020 results, your price target was $38. It is now $80. So you now think the company is finally worth double what you thought six months ago. Without a fundamental change, that seems like a lot. And the only change I see is the stock price going up over the *** period. Which might suggest that you're only raising your target because the stock price is going up - and in that case I have doubts about the usefulness of your analysis."

Analyst : "On what led to the price target increase over the last 6 months:
1/ The market has placed a higher multiple on the digital advertising sector in general, and we believe this market is much larger than current estimates.
2/ Snapchat has hired a ton of new leadership and the team is quickly cementing its reputation as one of the best in the industry.
3/ At the same time, the company has introduced several new products (Maps, Spotlight, eCommerce) with a clear path to monetization.

Me "Roger that. However, attached is an analysis from your own research house regarding Facebook in 2012. Your growth predictions for Facebook at the time were similar to what you give today for Snapchat, Facebook was already making quite a bit of money and yet you were only valuing it at 10 times sales. Why 22 times sales today for Snapchat?

Analyst : "Yes, Snapchat is trading at a significant premium to Facebook in 2012. Snapchat's growth rates are significantly higher (management has announced 50% annual growth for the next three years).
Digital advertising is less risky today, as are social networks (MySpace's collapse was still fresh in investors' minds).
Making money is much less important, as investors are much more confident in the life of a social network."

Today Snapchat stock is worth $35. It has lost 40% since these trades.^nd Q3 results in particular have been very disappointing. Looking ahead, management has warned that growth will be significantly lower than they said. We have terminated our subscription to this research service. And Peter Sellis is gone..

Have a great week,

Charles

* rather than an earnings multiple
** Snap had just announced a loss of $287 million for the previous quarter
*** the stock had gone from $35 to $60 during that period