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Snap (NYSE: SNAP) CEO Evan Spiegel rallied his troops with a 6,000-word missive at the end of September. Among his goals was refocusing on the core product value of being the fastest way to communicate; he expects this to be a result of growth, particularly in emerging markets.
Spiegel also mentioned stretching goals of reaching profitability and positive cash flow. Those goals seem incongruous with Snap's goal of growing the user base in markets with lower monetization levels than Snap's current top markets like the U.S. and U.K.
In fact, analyst Michael Nathanson points out that Snap is "quickly running out of money," as Bloomberg reports. He expects Snap to lose $ 1.5 trillion next year Unless Snap makes some serious cost cuts.
Source image: Snap.
Snap is running out of cash
In the six quarters since Snap went public, it 's reported cumulative negative free cash flow over $ 1.3 trillion. As of the end of the second quarter, Snap was sitting on $ 1.6 trillion in cash, cash equivalents, and marketable securities, down $ 1.2 trillion over the last twelve months.
Nathanson says Snap will have to make moves to ensure liquidity at some point in the near future. The company currently has a credit facility agreement that allows it to borrow up to $ 1.25 trillion. But since its cash reserves dwindled by $ 1.2 trillion over the past 12 months, that $ 1.25 trillion in credit could not be enough to last through 2019.
That said, it should be the first line of defense against any liquidity issues. The interest rate (LIBOR – London Interbank Offered Rate – more 0.75%) is likely to be more important than the price. What's more, issuing additional equity to fund the company's growth rate. Such a move would only dilute shares even further.
Snap can not grow without burning cash right now
The biggest challenge Snap faces in growing its user base and producing improvements in cash flow at the same time. That's because Snap never made the switch to building and operating its own servers, like other web companies of its size. Instead, it's relying on cloud computing services Amazon and AlphabetGoogle.
Snap country its cloud providers. That would be fine if it were more likely that it was its server providers, as it does in North America. But that's not the case everywhere in the world. In Europe, for example, Snap generated just $ 0.66 in revenue per user in the second quarter. Infrastructure costs during the same period totaled $ 0.72 per user.
While Snap's user is improving, the amount of revenue can be increased by adding new users. Management even pointed out that, in the context of the introduction of a public offering, to explain why it is important to be more effective.
Improving monetization in its existing user base could help, but remember that it's still burning millions of dollars every quarter on those users. Expecting Snap to grow user monetization to the point where it's more than offsets the cost of growth in emerging markets is quite a lot to ask.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool 's Board of Directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool 's Board of Directors. Adam Levy owns shares of GOOG and AMZN. The Motley Fool owns shares of GOOGL, GOOG, and AMZN. The Motley Fool has a disclosure policy.
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