Beloved by younger millennials and up-and-coming Generation Z members, Snapchat is the little social media engine that could in an era when it seemed the social media die had all been cast (and where Facebook won most of the rolls). However, beloved and profitable are different — and, though Snapchat and its disappearing messages have a tight hold on their following — they are running distinctly low on funds.
According to reports in The Information, Snap Inc. is going to need an infusion of dollars, and probably soon. The firm torched through $1.1 billion in five quarters, and that is not counting acquisitions. That just good old-fashioned operational costs.
That means Snap is going to need some dollars at some point within the next year and a half — and it seems to have snuck out of a securities filing in early May that strongly indicates it is trying to raise some funds by a sale of shares or debt. The filing, according to The Information, in and of itself is unremarkable and is a standard filing, but does stand a stark reminder that Snap needs cash.
Snap's problem with selling shares or debt, of course, is convincing investors to take the risk when Snap's share price continues to sink. The firm is currently trading at 32 percent below its initial public offering (IPO) price, which makes a sale of shares something of an uphill push. Equity sales post IPO are not uncommon — sales when the stock price is tanking, on the other hand, don’t happen all that often. And Snap's performance is against trend for internet firms — Facebook, Twitter and Google have all gained ground in the market in the last year.
Borrowing is an option, but an expensive one as interest rates are climbing.
Snap's best bet might be an investor looking to pump in money for a stake. Tencent, The Information opines, might be the best choice as it is already an investor — but another big firm like Apple, Amazon or Google could be a live possibility. Really, any firm with a vested interest in holding off Facebook.
Snap's trouble comes as it has stumbled, post IPO, to grow. It's user base remains loyal — but not growing — and ad revenue has come in consistently below expectations. Added to that, Facebook-owned Instagram has managed to grow, largely on the strength of features it has borrowed from Snap over the last two years. Some analysts remain relatively unconcerned, as Snap has moved toward cost-cutting and consolidation — and increasing revenue generation could push off some of the cash pressures, so long as the revenue growth did not cause an explosion in costs.
CEO Evan Spiegel has stated internally that he’d like to see the company break even this year, at least before taxes, interest and accounting charges. Whether it makes that goal remains to be seen — reports indicate that there is a strict deadline to reach that break-even point and it's unknown if it will make it across that hurdle.
Snapchat To Sell?
Snap has turned down purchase offers (most famously from Facebook), but the analysis seems to be that Snap could offer an attractive target for a behemoth tech firm. At a recent conference, Spiegel was non-committal about whether he’d be open to selling the company, saying only that he had a fiduciary duty to consider it.
There is also the reality that there have been recent changes at the top. Shortly after Snap's last earnings call, CFO Drew Vollero announced he would be stepping down. Following that, it was announced that former Amazon executive Tim Stone would be stepping into the role.
As a group, the Snap leadership team has been incredibly quiet about the firm, particularly regarding its long-term cash needs, considering its rapid burn rate. The executive team has instead, according to reports, kept their focus on and behind new product offerings, as they maintain that is the best way to get Snapchat back on the right track.
It's not a bad position — as reigniting revenue growth would go a long way toward solving Snap’s cash issues. However, if that doesn't happen, Snap's next move could be very interesting to consider — particularly if another firm is going to snap them right up.