Snap (NYSE:SNAP) is running out of money and may need to raise cash as soon as 2019, according to at least one analyst. However, CEO Evan Spiegel told Snap employees he wants the company to be profitable by next year. Someone's view of the future is apparently skewed.
The question investors will need to ask is whether Snap's future is so bleak that its finances are essentially a bust, or is it on the brink of pouring a solid financial foundation on which to grow?
We have met the enemy, and he is us
There's certainly a good case to be made the business is deteriorating. Spiegel admits the bungled Snapchat redesign has weighed heavily on the company's performance. In his email, he told employees that by rushing the changes, "The biggest mistake we made with our redesign was compromising our core product value of being the fastest way to communicate."
Of course, it was Spiegel himself who goaded his engineers to redesign the app as quickly as possible and pushed it out the door despite reservations about its viability. The results of the wide release were disastrous, as engagement plummeted and Snap reported its first quarterly decline in users. To counteract the mistakes, Spiegel has laid out an ambitious plan that includes expanding into markets outside those considered its core, bringing in older customers to increase revenue, and ultimately turning profitable.
A confused vision for the future
There are lots of risks involved in following that road map. By expanding into emerging markets, there is no critical mass of users, which would make it more difficult to attract advertisers to generate revenue. Because ad dollars follow user concentration -- Snap notes over 70% of overall advertising spend and nearly 85% of mobile advertising spend coming from the top 10 advertising markets (and 60% of its users come from these markets) -- it is tacitly acknowledging there is going to be little financial reward for some time, if ever, due to the expansion. At a time when it's hemorrhaging users and revenue, that could be a volatile combination.
Also, by trying to reach out to an older demographic, it risks alienating its core teen user base. No kid wants to use their parent's app. While older users might generate more revenue per user, it's going to require a sea change in thinking, because Spiegel admits more mature potential users view Snapchat as "frivolous." Snap will need to invest considerable sums of money to convince them Snapchat isn't a social media platform, but a speedy communications app.
There's no indication that marketing strategy will even work. Facebook (NASDAQ:FB) built up a massive core of users not because it meant instantaneous connection between people, but because it allowed users to remain in touch. Simply because users will be able to point their Snapchat app's camera to take and post a picture right away doesn't necessarily mean older people will gravitate toward it.
It also just introduced a new feature on the platform called Originals, which is a series of scripted programs, which seems to really muddle what exactly Snap is trying to achieve. It's all over the place on what it wants to be.
The clock is ticking
Spiegel's grand plans will also run up against Snap's looming cash shortage. Analyst Michael Nathanson of MoffettNathanson said Snap "is quickly running out of money" and cut his revenue estimates by 7% for 2019 and 15% for 2020. He estimates Snap will lose over $1.5 billion in 2019.
Spiegel, on the other hand, has a "stretch goal" to break even in the fourth quarter of this year before turning profitable next year. Of course, we'll need to see whether Snap can pull out of its deep dive in the third quarter, but even then breakeven status by year's end -- let alone profitably next year -- seems to be the real stretch.