Tech

Snapchat investors are buying into a camera company

Snapchat Spectacles
Source: Snapchat

Snapchat has made all its money to date from digital advertising. But as investors prepare for an upcoming IPO, they have to consider what the parent company Snap will look like in a very different business.

There's not much subtlety to it.

"Snap Inc. is a camera company," says the front page of its website. "We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate."

Last month, Snap introduced Spectacles, sunglasses that allow users to take 10-second videos and quickly share them with friends. They're expected to start selling within months for $130.

Based just on its core business of delivering immersive ads inside its social media app, Snap's revenue is predicted to jump almost fivefold by 2018 to $1.76 billion, according to eMarketer. While Snap still appears to be burning quite a bit of cash, growth numbers like that from a software-based company suggests enormous future profitability.

Facebook, after losing money in 2007 and 2008, turned profitable in 2009 and two years later generated $668 million in net income on $3.7 billion in revenue.

Snapchat changes name to Snap
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Snapchat changes name to Snap

But Facebook is almost purely an advertising company and didn't begin experimenting with hardware until the 2014 acquisition of virtual reality headset maker Oculus.

Snap is already asking investors to think about the company in a very different way, and they won't have much sales data on Spectacles to help guide them. Snap is expected to file a confidential IPO prospectus by the end of this year and has chosen Morgan Stanley and Goldman Sachs to lead the offering, according to sources familiar with the matter, who asked not to be named because the details are still private.

Bloomberg previously reported on the lead bankers and The Wall Street Journal reported last week that Snap could debut by March in an offering that values the company at more than $25 billion. Snap didn't immediately respond to a request for comment.

At that kind of price, Snap would be valued at about 27 times estimated 2017 revenue. Facebook is currently worth 16.7 times sales, and had a price-to-sales ratio of 26.5 at its valuation peak, according to FactSet. Twitter trades at 5 times revenue, and Alphabet at close to 7 times.

As a device company, Apple commands a multiple of just 2.9 times revenue, which is significantly higher than how investors value Fitbit and GoPro.

The biggest question for investors: Can Snap succeed in hardware? Materials, distribution, sales and marketing all require significant new investments and, more importantly, a change in strategy. Morphing from a digital ad company to a hardware company carries risks for investors, since the market tends to pay a premium for software companies.

Google has struggled, notably with Google Glass, and it's still very early days on the market for Facebook's Oculus. Microsoft is a rare example of a company that's successfully jumped from software to hardware, but it was a quarter century from the time Bill Gates founded Microsoft until it unveiled the Xbox game console. And let's not forget how miserably Microsoft failed with the Zune music player and its perpetual struggle with mobile phones.

From searching on LinkedIn, here's what we know about the Spectacles team. The product has at least two internal recruiters in Los Angeles and one in New York and an industrial designer from the eyewear industry. Additionally, there's a technical program manager who came from Microsoft, an engineer from Apple and a software engineer who recently graduated from the Massachusetts Institute of Technology.

Of the 120 or so open roles Snap lists on recruiting site Greenhouse, eight are specifically targeted at helping develop and build out Spectacles.

—CNBC's Kayla Tausche contributed to this report.