By: Earnest Wright | 08-16-2017 | News
Photo credit: Snap

Snap is in Trouble: Bleeding Cash

A second quarter revenues, earnings, and growth in new customers were announced by Snap on the 10th of August. The projections fell short of analyst’s predictions, causing an undesirable effect in it’s stock.

After taking the market by storm, snap is taking a different turn as the stock has gone down by an additional 10% by midday Monday, August 14.

Snap’s sales for the three months that ended on the 30th of June rose $110 million equivalent to 152%.

However, the company’s expenses overtook the increase in revenues. This resulted from the huge increases in sales and marketing and R&D.

Snap is spending loads of cash to fill the gap, for the 12 months that ended in June, it devoured $747 million in cash to fund its operations. It has also been an active acquirer.

In Q2, it purchased Zenly of France, provider of maps that allow users to pinpoint their friends' precise locations and trace their travels. Snap spent around $333 million in acquisitions in from Q2 '16 to Q2 '17.

The total cash outlays on operations and acquisitions over the 12 months period was almost $1.1 billion.

The debit is likely to increase for the many quarters ahead. The difference between the revenues and expenses is taking an upward trend. Snap won’t stop, in July, it acquired Placed, whose software tracks purchases for advertisers, for $135 million.

This proves that the expenses are bound to increase. As a result, there’s need for an enormous cash cushion that will furnish Snap a long runway.

The period of time that will be required for the market to embrace its photo-sharing product, as a result of which it will be profitable is highly uncertain.

Snap’s overhyped IPO raised $2.658 billion by selling 160 million shares at a price, minus commissions, of $16.575. Since it already had plenty of cash before the IPO, Snap's horde now stands at $2.8 billion.

If Snap continues burning cash at the current rate of well over $1 billion a year, it probably has less than two years before it will need to start generating substantial profits and free cash flow

This calls for all concerned parties to evaluate Snap's handling of its IPO. The underwriters pre-sold the shares at $17, far less than big investors were willing to pay.

The company netted $16.575 after a 2.5% commission to underwriters. On March 2, the day following the offering, Snap's stock soared to $24.48, and closed on March 3 at $27.09.

Investors have since reckoned that Snap's worth a lot less than $24, or even the IPO price of $17. But for cash in the treasury, what matters is what the institutions would have paid when the underwriters pre-sold the shares.

That number is at least $24. If Snap's owners had demanded top dollar, instead of handing a deep discount to money managers who were supposed to show their gratitude by remaining loyal, long-term holders, the photo-sharing phenom would have banked not $2.658 billion, but $3.8 billion. That's a difference of over $1.1 billion, or 41%.

Snap would now be holding a horde of $3.9 billion. Instead of at most two years in cash at the current burn rate, it would be flush for three years. The extra cash would raise its book value by $1.1 billion, in all probability raising its market cap by the same amount, adding 8% to its stock price.

It turns out that the investors who got a deep discount were not loyal after all, the big selloff proves it.


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