What Is a Facebook App Developer Worth? Wall Street and Sand Hill Road Disagree

Private markets continue to attach soaring valuations to top-ranked Facebook app developers. But public markets, at least in the case of SNAP Interactive, have been quite punishing.

While SNAP is best known for its “Are You Interested?” matchmaking application, the New York-based site has another claim to fame: It also happens to be one of the few publicly traded companies prominent in the app space.

CEO Cliff Lerner took SNAP (OTC BB: STVI) public a couple of years ago in a $350,000 bulletin board stock offering, with the help of his brother, Darrell Lerner, a securities lawyer. Over the past couple years, the company has seen its traffic grow nicely. It’s now the 15th most popular app developer on Facebook, according to AppData, with more than 14 million monthly users and about 800,000 daily users.

What’s that worth on the public market? As of the close of trading Monday, SNAP had a market cap of just $7 million.  So, I asked the Lerners: What’s up with that?

“I’d say, in looking at other comps in the space, we’re trading at a significant discount based on certain commonly used valuation metrics,” says Cliff Lerner.

Lerner points to EasyDate, a company traded on London’s AIM exchange, as an interesting comp. It offers a Facebook dating application called “Be Naughty,” several destination sites, and has a market cap of nearly $140 million. EasyDate’s revenue, according to Lerner, totaled a little over $13 million last year.

SNAP, like most Facebook app developers, makes applications that are free to use, but charges for premium features. On “Are You Interested?”, for example, paying subscribers can contact a broader selection of potential dates, send unlimited gifts and access a “hotties” browsing feature that uses an algorithm to pick out photos of people likely to be considered good-looking.  Subscriptions cost $10 and up a month and, while the Lerners didn’t specify the portion of total users who pay, they did say the monetization rate isn’t too different from the social gaming industry, in which the vast majority play for free, and a couple percent buy stuff.

Overall, revenue has been growing nicely this year. SNAP reported Q3 revenue of $1.7 million, up from $1.24 million in the prior quarter and $800,000 in the same period a year ago. Gross cash receipts for the third quarter were actually higher — around $2.3 million — but since revenue is recognized over the term of a subscription period, some of that has to be accounted for in the next quarter. As for profits, at $87,000 in Q3, they’re not exactly reminiscent of the next Google. But the Lerners say they’re doing what most companies a few years old would do in their shoes: investing in growth and scaling up their staff of about 17 full-timers.

As for private market comps, the closest I could come up with was Zoosk, the dating app developer that has raised about $40 million since 2008 from ATA Ventures, Bessemer Venture Partners and Canaan Partners, according to Thomson Reuters (publisher of this blog).  Zoosk has about 6.5 million unique monthly users on Facebook, according to AppData.

Lerner mused that SNAP may be discounted because it’s out of the Silicon Valley loop, being on the opposite coast and never having taken venture funding. The Lerners declined to disclose whether, since going public, SNAP has entertained serious M&A offers or potential PIPE investments. Currently, insiders own around 75% of the company.

The market cap is rather puzzling when one considers generous valuations attached to others in the app space. Generally, I like to assume that when a well-regarded investor attaches an enormous worth to a Facebook app developer, they’ve done some serious number crunching to justify that valuation.

Certainly, I wouldn’t have paid $563 million plus a possible $200 million earnout for Playdom, the No. 6-ranked Facebook Apps developer based on monthly unique users, according to Appdata.com.  But I figure Disney had some reason to think the price worthwhile.

And I questioned whether Electronic Arts did well buying then No. 2-ranked (now No. 5-ranked) Playfish last year for up to $400 million. One would think a company with one of the largest talent pools in the gaming industry would be able to come up with its own app play. But hey, EA needed a foothold in the fast-growing space ASAP, and one would assume they’d done their homework to determine that a fast, albeit pricey, M&A move beat out relying solely on in-house expertise.

This past week, however, I’m increasingly questioning valuations. If public markets are too be seen as efficient means to set value, then SNAP’s $7 million market cap ought to be causing more than a few deep-pocketed acquirers to reconsider what they’re willing to pay for an app company.