Snapchat, according to recent reports, is having cash flow troubles. The app that got famous for its disappearing messages is looking like it will either need to raise a some capital by sometime in 2019 or run the risk of going broke, according to a note by MoffettNathanson.
“While it is obvious that Snap wasn’t prepared for life as a public company, it now has a more pressing problem. It is quickly running out of money,” analyst Michael Nathanson of MoffettNathanson wrote.
Nathanson went on to slash his revenue estimates for Snap Inc. by 7 percent and 15 percent from his 2020 estimates, on the basis of what he identified as Snap’s two leading problems at present: sluggish new-user growth and slow growth in revenue per user.
The Street, chilled by the forecast, sent Snap’s stock down such that the firm hit an all-time intraday trading low on October 9, and finds its share price down 55 percent from its initial public offering (IPO) in March of last year.
Turnarounds in tech — and in social media in particular — are not unheard of, Nathanson wrote, meaning it is not impossible for Snap to snap back from all this. But at this point, he is skeptical that Snap can manage a hat trick.
“Although Twitter pulled off a similar miracle, call us skeptical as — despite the memo — we don’t have faith in Snap's leadership to navigate these rapids,” Nathanson added.
The “memo” to which Nathanson refers is a release from late last week from Snap in which CEO Evan Spiegel sought to outline the firm’s new strategic goals and acknowledged shortcomings in a recent design of its app.
“In our excitement to innovate and bring many new products into the world, we have lost the core of what made Snapchat the fastest way to communicate,” Spiegel wrote in the document, calling the update “rushed.”
And rushed in a way that has weighed heavily on both Snapchat's ability to retain and monetize its user base. Snap has confirmed it is redesigning its redesign, and that is currently testing a Discover section that highlights celebrity and professional company accounts.
“It has been approximately six months since we broadly rolled out the redesign of our application, and we have been working hard to iterate and improve Snapchat based on the feedback from our community,” the CEO wrote.
This is one of a host of recent troubles Snapchat has faced since going public, troubles that are increasingly noticeable and worrisome to market watchers. Snap does seem to be serious about getting back on track, and has attracted some recent interest from outside partners looking team up or invest.
However, whether Snapchat can stand alone and remain a going concern, or if it is on the way to being snapped up on the relative cheap by a larger player that can leverage its assets more efficiently, is becoming an interesting question.
The Troubles Snap’s Seen
If one had to sum up Snapchat’s troubles with a word, that word would likely be “Instagram,” Facebook’s photo-based Snap competitor. If imitation is the sincerest form of flattery, then Instagram has flattered so effectively that it has consistently grown in users and revenue, while Snapchat’s has stagnated.
Last week, before Spiegel’s memo, a note from Evercore ISI that said Instagram is “irreversibly reducing Snap’s opportunity to deliver on long-term investor expectations.” On that news, shares of Snap dropped to what was then a record low; Spiegel’s note and subsequent responses helped Snap set a new record this week.
Though this recent flair-up has been dramatic, it has been part of a pattern with recent stories out of Snap as it has struggled to adapt to being a public firm.
This summer, Snapchat pulled back its P2P payments service Snapcash after the service saw combined problems of low usage and undesirable usage. Designed to be a way for users to split up bills, the app didn’t really catch on the way players like Venmo, PayPal, Zelle and Square Cash did, and instead ended up mostly being used for niche services of the adult entertainment variety. In fact, a Twitter search for “Snapcash” found numerous offers of erotic content and services in exchange for payments through the service.
“Yes, we’re discontinuing the Snapcash feature as of Aug. 30, 2018. Snapcash was our first product created in partnership with another company, Square,” a Snapchat spokesperson told reporters. “We’re thankful for all the Snap-chatters who used Snapcash for the last four years and for Square’s partnership.”
In June, a court ruled that investors could sue Snap for failing to disclose how much competition from Instagram, the photo-sharing social media network, was impeding its ability to grow in the last six months of 2016, before its IPO.
Snap had been attempting to have the suit dismissed, to no avail. Investors contend Snap didn’t disclose a whistleblower lawsuit by an ex-employee who claimed there were inaccuracies in how Snap calculated and reported daily active users. They also claimed that the company misrepresented its use of so-called growth hacking, in which Snap sends push notifications to its users to improve its daily numbers. Snap has declined to comment on the ruling.
The shareholders’ next move would be to pursue class-action status, which the report noted would put it them a better position to negotiate with the company.
Also in June, rumors began to swirl that Snap’s days a stand-alone business were coming to an end and that the firm is preparing itself for a sale. Such rumors are now looking more likely, particularly as Snap’s struggles seem to coincide with it making some high-profile friends.
Will Snapchat Snap Back, Or Get Snapped Up?
The Apple pick at the time was mostly conjectural: Apple easily has enough free cash on hand to purchase Snap several times over, and Snap’s lasting popularity among millennials and emerging Gen Z consumers could be a value producer for both the Apple ecosystem in general, and for some of its specific services like Apple Pay, going forward. Moreover, given the firms' mutual interests in building out augmented reality (AR) and virtual reality (VR) applications for mobile technology, some observers noted it makes sense for Apple to acquire Snapchat and combine efforts, rather than allow the possibility that it could survive its current troubles and come back from the near-dead to be a major competitor in the AR/VR field.
Tencent was also named as a possible natural corporate home for Snap Inc., after it increased its stake in the company by more than 12 percent about a year ago, following announcements that the firm has failed to reach growth projections and was seeing a decrease in ad sales.
According to The New York Times, the investment by the Chinese internet giant aimed to give the struggling Snap a boost of confidence. In a filing with the Securities and Exchange Commission (SEC), Snap said that Tencent and its affiliates had “recently acquired” 145.8 million non-voting shares through purchases in the open market. That represents nearly 17 percent of Snap’s Class A shares, and about 12 percent of its total shares.
At the time of the investment, Tencent officials noted that they viewed their purchase as a “strategic investment.”
Speaking of strategic, the new possible suitor favored by the market as a possible match for the struggling Snapchat seems to be eCommerce giant Amazon. The two firms have been collaborating on visual-search advances for the last six months, and as of last week the firms jointly announced that testing is underway on new search method for products on Amazon using the Snapchat camera.
The method works by allowing users to point their smartphone camera at a physical product or barcode, and press and hold on the camera screen. That action, according to a Snap press release, will cause an Amazon card will appear onscreen, surfacing a link for that product or similar ones available on Amazon. By tapping on that card, users will be taken to Amazon to complete their purchase before being sent back to Snapchat.
Amazon’s search tool has been criticized in the past for being a bit difficult to navigate — and its ecosystem ambitions are more than clear. Snapchat, observers noted, wouldn’t be an expensive purchase for Amazon, and its popularity among young users and its augmented reality (AR) and visual search tools could be a major value-add for Amazon, if it wanted to move in that direction.
Whether Snapchat wants to be sold remains an open question. Facebook famously tried and failed — although the Snapchat that turned down Facebook is a very different firm than the one that has been trying and failing to compete directly with Facebook for the last two years.
Spiegel, for his part, has been tight-lipped on the possibility of a sale, saying in August only that he has a fiduciary responsibility to consider all offers.
But it does seem, if reports are accurate and Snap has burned through $1.1 billion in the last five quarters, that something pretty big is going to have to change — and soon.