If you think it's crazy that Snapchat might go public at a $40 billion valuation, here's something to consider (FB, TWTR)

Snapchat wants to go public in the first half of 2017. Its valuation, Bloomberg reports, could be up to $40 billion.

If you consider Snapchat's business today, that seems ludicrous.

Snapchat, which recently changed its corporate name to Snap Inc., will reportedly generate about $300 million in 2016, up from roughly $50 million last year. Even if you believe Snap can generate $1 billion to $2 billion in 2017 — its rumored projection — a $40 billion initial public offering would give the company a hard-t0-justify 40X multiple.

Its ad offerings and technology are relatively early days, compared with peers such as Google and Facebook, and TV ads — which Snap likely wants to compete against — are still generally priced much higher than online video units.

Facebook, by comparison, is expected to generate about $27 billion this year. And although it boasts a massive $370 billion market cap, Facebook's stock is trading at only 10 times as much as next year's projected revenue.

For many investors, that's reason enough to dismiss Snap.

But if you ignore the numbers for a minute and look at Snap's product and leadership track record, it becomes much tougher to write the company off as an overhyped flash in the pan. If Snap's impact on the tech industry over the next five years is as profound as it was in the past five, then some of the heated expectations around the company might not be so outlandish.

Evan Spiegel is considered a product 'Picasso'

Spiegel isn't a technical founder — someone who writes lines of code — like Google's Larry Page or Facebook's Mark Zuckerberg. And his company doesn't make decisions based on data, ignoring a fundamental tenet of Silicon Valley's engineering-driven companies.

Instead, Snap operates more like a creative shop where Spiegel obsesses over the product. As one person who has worked there explained, if you imagined a movie director starting a company, with artists flowing in and out, that's what Snap's office vibe is like.

Spiegel's emulation of Steve Jobs has been much talked about, with the 26-year-old Snap CEO sharing the late Apple founder's passion for showmanship, secrecy, and suspense when it comes to creating products.

But Spiegel isn't just another Jobs imitator. He has proved multiple times that he can invent hit products that set industry trends. And like Jobs, he has some fiercely loyal followers who believe he's the real deal.

"Admirers say Spiegel is as good at building products as Mark Zuckerberg and Steve Jobs,"Recode's Kurt Wagner wrote. "And if you think that's hyperbole, you should talk to several of the sources we spoke to for this story, who casually likened him to Picasso."

Radical-sounding ideas that have proved to be right

Throughout Snap's five-year history, Spiegel has made a series of decisions that seemed crazy at first, but proved to be right. Consider:

• Before Snap, the internet was permanent. Every tweet, message, or photo was documented forever on sites such as Google and Facebook — even the unflattering ones. Snap single-handedly blew that up, introducing the notion of ephemerality. Whether it's teens regularly culling their Instagram accounts of posts that are more than a week old, or the bevy of messaging apps designed for self-destructing communication, Snap's idea is now increasingly the norm.
• Snap popularized vertical video, a format that makes much more sense on phones. Horizontal video, the so-called landscape mode that you watch TV shows and movies in, was the undisputed standard for video until Snap came along. Now a growing number of publishers, advertisers, and even online video rivals like YouTube have latched on to videos that are shot vertically.
• Turning down a roughly $4 billion acquisition offer from Facebook turned out to be smart. It's not easy to refuse an offer from Mark Zuckerberg — just ask the founders of Instagram, WhatsApp, and Oculus — especially when the offer is multiple billions of dollars. But three years later, Spiegel's company is already worth about five times Facebook's offering price, and if it IPOs at $40 billion, Snap will be worth 10 times that.
• He's rethinking the shape of photos and videos from squares to circles. The idea has yet to be proved, but Spiegel's logic is sound. For Snap's Spectacles sunglasses, "the video it records is circular, more like human vision,"The Wall Street Journal's Seth Stevenson wrote. "Spiegel argues that rectangles are an unnecessary vestige of printing photos on sheets of paper."

Snap doesn't have just one hit product — it has at least 6

When Snap launched, it looked like a fad. It was considered a sexting tool for college students that made lewd photos disappear. But a lot of red-hot apps that fail to keep innovating die shortly after launch: Yo, Ello, Meerkat, even Pokémon Go quickly lost its cool.

Instead of riding out its one smash hit, Snap launched a series of new products that kept users sticking around:

• Snaps. In 2010, Snap launched its flagship feature: disappearing photo and video messages. Now more than 1 billion snaps are viewed every day. Video views on Snapchat have grown more than 350% in the last year, to more than 10 billion daily views.
• Stories. In October 2013, Snap allowed users to create strings of photos and videos that disappear in 24 hours, called Stories. Stories are now viewed by 10 million to 20 million users a day.
• Discover.Snap launched Discover, a section for media publications to post articles, in January 2015. Now 100 million users view it every month. That's vastly lower than the number of people who are snapping back and forth each day, so you could argue Discover isn't a hit. But it accomplished an important goal for Snap: It infatuated the media. This worked for Facebook when it began driving traffic to publishers from its news feed. Zuckerberg had reportedly been upset that journalists were infatuated with Twitter. So BuzzFeed's Jonah Peretti apparently advised him to "show them how much traffic you can drive. ... That will cure the journalists of their attachment to Twitter, and get better press for Facebook."
• Filters. They launched in December 2014, and users now view snaps with geofilters more than 1 billion times a day.
• Lenses and Messaging are also popular on Snapchat. Even sponsored lenses that Snap makes money from are getting a decent amount of user interaction. For example, Taco Bell's Cinco de Mayo taco-face selfie lens was viewed 224 million times.

Of course, not everything Snap has launched has taken off. For example, Snap tried SnapCash, a service similar to the payments app Venmo, and a few in-app payment features that never went mainstream. But the company had enough hits to prove it's no one-trick pony.

"One of the company's great attributes is their willingness to put out a lot of product," Snap investor Mitch Lasky told Recode. "Evan's got a lot of interesting ideas and he's absolutely fearless about putting them out there. If they don't work, so be it."

Facebook's paranoia

A major indicator of Snap's potential upside is Facebook's reaction to it. At first, things were cordial.

Zuckerberg emailed Spiegel in November 2012 to say he was a fan of his app.

Within weeks of meeting Spiegel and his cofounder, Bobby Murphy, Zuckerberg launched a near clone of Snapchat, called Poke. The app failed shortly after it launched.

One year later, reports surfaced that Facebook had made an offer to purchase Snap for billions of dollars, but Snap declined. Since then, Facebook has launched more than half a dozen apps and features that resemble Snapchat.

The Verge put together a timeline of Facebook trying to copy Snap. It lists eight total instances, excluding the most recent cloning examples — such as Facebook's August launch of Instagram Stories, which mimics Snap's Stories features down to its name, and Live Masks, Snapchat-like face filters that Facebook announced in October.

Snap seems to be the only real thorn in Facebook's side, catering to a younger audience of teens and 20-somethings that Facebook would love to have. And Facebook has a history of waging war on any product it deems a threat.

For example, when Google launched its social media platform, Google Plus, Zuckerberg called an all-hands meeting and put the company on "lockdown," with employees encouraged to work around the clock to defeat the competition.

"You know, one of my favorite Roman orators ended every speech with the phrase 'Carthago delenda est' — 'Carthage must be destroyed,'"Zuckerberg told employees. "For some reason I think of that now."

How Snap looks compared with Twitter and Facebook

Based on some of the data we have about Snap (the company has not yet publicly filed its prospectus), it's fair to say Snap isn't in the same league as Facebook was at the time of its IPO — though Snap is seeking a valuation of less than half of Facebook's.

If Snap were to go public today, it would have significantly fewer users than the 900 million monthly actives Facebook had at its IPO. It would also have about one-tenth of Facebook's revenue — roughly $350 million versus Facebook's $3 billion to $4 billion.

Facebook ended its first day of trading with a $104 billion market cap, about 26 times as much as its revenue. Although Facebook's value was cut in half four months later, it rebounded to its IPO price once the company mastered mobile monetization. (Facebook generated almost no mobile revenue when it went public.)

But Snap is only five years old, and Facebook was eight when it was listed. When Facebook was Snap's age, though, it was generating roughly $650 million, about double that of Snap.

If you compare Snap and Twitter, things look a little rosier.

Twitter was seven when it went public, and had about the same number of active users then — about 230 million per month — as Snap likely has now. Snap has already passed Twitter in terms of daily active users, according to Bloomberg. Twitter had about 100 million daily active users when it went public. It generated about $665 million in 2013, less than Snap is hoping to make in its sixth year.

Twitter's stock has been getting hammered lately on reports of layoffs, stalled growth, and lack of acquisition interest. The $27 billion market cap it had in 2013 has been sliced to about $12 billion today. And Twitter still has not managed to turn a profit.

What will Snap become?

Can Snap become a behemoth the size of Facebook or Google with more than 1 billion users? If so, then a $40 billion valuation isn't outrageous.

Or will it become Twitter, which tried to chase Facebook's scale but never quite nailed the experience for the masses?

Snap, like Twitter, isn't easy for non-millennials to immediately grasp. And Snap will need to attract older audiences if it wants to keep growing.

Snap could also become something else entirely — a $20 billion messaging app like WhatsApp, a $15 billion media company like Viacom, or a camera company like the much smaller $1.4 billion GoPro.

Those are a lot of unknowns for public investors. But because the company is young, there could also be significant potential upside, and Spiegel has consistently proved that he isn't someone to underestimate.

"When Snap started out, I thought it seemed trivial. I was completely wrong," Chamath Palihapitiya, a startup investor who hasn't invested in Snap, told Bloomberg.

"I don't think anyone saw coming what they are building."

SEE ALSO: What it’s like to work at Snapchat, one of the most secretive companies in tech

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