Snap, Inc. (SNAP) had its March 2017 initial public offering (IPO) at $17. The stock opened trading at above $20, climbing as high as $28.25 in its first week, but it dropped back down below $21 by the second week of the month. This volatility without any changes to the underlying fundamentals indicates a wide range of valuations among investors, so it is an informative exercise to examine the growth rates implied by Snap's market price.

Investors embrace a variety of philosophies and strategies when evaluating stocks, but the value investing principles developed by Benjamin Graham have proven to be popular and successful for long-term investments. Championed by the likes of Warren Buffet, Graham's approach assumes that stocks have an intrinsic value that can be calculated based on the current net worth of a company and the future earnings or cash flows generated from operations. Discounted cash flow and residual earnings are two popular valuation models for computing intrinsic value. (See also: What Is the Intrinsic Value of a Stock?)

Opponents of intrinsic valuation object to the reliance on difficult-to-forecast future financial results, which can be especially problematic with growth-stage companies or firms with unstable earnings. Even slight changes in model assumptions can significantly affect valuations, making it difficult to apply these strategies to a competitive market. However, these models can be useful tools for determining the expected financial performance implied by a stock's price. By holding the price constant, investors can run the model in reverse to identify the growth required to achieve a given valuation.

Snap is in its growth stage, and management's focus is not currently on profit generation. The company's primary objective is stimulating user growth, user engagement and top-line expansion. To create a functional residual earnings model, forecasting must be done in multiple stages leading up to a long-term stable phase. (See also: 3 Red Flags for Growth-Stage Companies.)

Forecast Financials Implied by SNAP Price

With so many moving parts in the valuation model, a given price can imply numerous different scenarios. Still, we can identify plausible figures that reflect the performance patterns of other firms in the industry. Consensus estimates call for net losses per share of $0.45 in 2017 and $0.20 in 2018. Revenue is expected to climb to $1.1 billion in 2017 and $2.3 billion in 2018.

Assuming that analyst forecasts are valid figures, investors can infer several things from Snap's $20.40 March 2017 share price. The implied revenue CAGR​ is 23.3% over the next 15 years, followed by stable 10% growth thereafter. Snap can remain unprofitable until 2022, after which its net margin would climb to 20%. These results would bring return on equity (ROE) to 20% in year 15 of the model, falling slowly through the company's stable phase. (See also: Analyst: Facebook Would Buy Snap for $14/Share.)

Data source: Morningstar

Snap's implied financial performance is certainly optimistic, but it is not exceptionally bullish when compared with industry peers. Facebook, Inc. (FB) has maintained top-line growth between 37 percent and 58 percent since its IPO, while the more mature Alphabet Inc. (GOOG​) still notched a three-year revenue CAGR of 15% in its most recent results. Twitter, Inc. (TWTR) has slowed dramatically but still had a 56% three-year average. (See also: Two Reasons to Still Like Facebook in 2017.)

Data source: Morningstar

A 20 percent operating margin would also be unremarkable. Facebook's operating margin has fluctuated between 35 percent and 45 percent since 2013, while Alphabet's fell from 27 percent to 15 percent over that same time period.

Data source: Morningstar

$20.40 could be an attractive entry point for investors expecting Snap to approach Facebook's performance at comparable stages because that price implies inferior financial results to those of the incumbent social media giant. However, Twitter's struggles with sustained top-line growth and profit generation are a cautionary tale. Snap's valuation currently assumes 15 years of strong operating performance. (See also: Can Snapchat Threaten Facebook's Ad Business?)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.