I was amazed to read recently that Snap Inc (NYSE:SNAP), the company that owns and operates the popular Snapchat camera, chat, and storytelling platforms, has now raised nearly $7.2 billion from investors to build and expand its social media empire. That’s a lot of money for a service that basically allows people to send photos, chat, and share stories via their smartphones.
Yet, the user base represents a very appealing target for advertisers. The installed base of users is growing rapidly and is the millennial demographic that doesn’t consume as much as older generations. Cable television, print media, and telephones represent “old media” these days.
Snap received its first “seed” capital of $485,000 in May 2012. By the end of 2014, SNAP had raised $485 million from eponymous venture capital firm Kleiner Perkins Caufield & Byers. At the time, the investment round valued the company at $10 billion. In May 2016, it raised another $1.8 billion at a $20 billion valuation.
SNAP’s recent IPO brought in $2.7 billion, which accounts for a bulk of the $3.2 billion in cash sitting on the balance sheet. That’s quite a war chest to continue to build out its platform across the world, though billions have already been spent doing so.
This shows just how far Snap has come since its founding. As it stands, it qualifies as one of the most successful venture capital investments in recent years. Facebook Inc (NASDAQ:FB) is the standout winner, and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has also done extremely well in recent years. Initial Snap investors can’t be happier, but public shareholders might not fare nearly as well.
SNAP Stock Looked Good
Like many other social media firms, Snapchat tracks several user metrics across its global user base. It tracks daily active users (DAUs), monthly active users (MAUs), as well as the average revenue per user (ARPU).
Daily active users jumped an impressive 36% during Snap’s first quarter and totaled 166 million individuals. North America represented 42% of the total. Europe represented another 33%, with the rest of the world making up the remainder.
Average revenue per user nearly tripled during the first quarter. On a global basis, it jumped from $0.32 to $0.90. North American ARPU is double the global average, but only $0.24 in Europe and a woeful $0.19 in the rest of the word. Hosting costs per user are about $0.60, so there is work to do to get to profitability across the global user base.
Total sales growth continues to hum along. It rose from $39 million in last year’s quarter to a recent $150 million. But, the problem isn’t sales growth — it’s spending.
Snap has spent $3.4 billion so far in its short history (it only started in 2011 and raised the seed capital shortly thereafter) to get to what should amount to $1 billion in sales this year. Sales are expected to double to $2 billion in 2018, but that’s a lot of spending to generate what are, so far, only large bottom-line losses.
Bottom Line for SNAP Stock
Snap will lose an estimated $2.75 per share this year, but only $0.64 in 2018, based on current analyst expectations. Again, that’s a trend in the right direction, but not overly inspiring, as SNAP shareholders expected the company to eventually turn a profit.
Doubters abound on SNAP stock. Shares were first issued publicly at $17 per share and jumped 44% to $24.48 on their first day of trading. But, slower DAU growth and a sizeable first-quarter loss (it had to expense $2 billion in share-based compensation as part of its IPO) have sent the shares back to $18.85, or just above the IPO price.
Count me in that camp. If Twitter Inc (NYSE:TWTR) can’t find a compelling way to monetize its global base of several hundred million users, Snapchat seems an even tougher riddle to solve. Snap does boast an important millennial demographic that advertisers seek, but it seems difficult to turn that into steady sales at the companies that choose to advertise on Snap’s services.
Snap’s current valuation (its market capitalization) is $20.5 billion, or not much more from last year when it was still a private company. I plan to remain on the sidelines until cash flow trends improve.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
