Social media company Snap (NYSE:SNAP) reported a smaller-than-expected loss for the fourth quarter last week, and more importantly, told the market its active user base is not shrinking anymore. Investors rewarded the company for those accomplishments with a 26% share price boost. But the real question now has to be whether the investment thesis on this troubled business has fundamentally changed.
In this segment from MarketFoolery, host Chris Hill and Head of Motley Fool Asia David Kretzmann consider that question, reflecting on the impact of its latest redesign, user engagement, the influence of short-sellers, how it compares to its rivals, and -- perhaps most important -- how long Snap can survive with the cash it has on hand before the coffers run dry.
A full transcript follows the video.
This video was recorded on Feb. 6, 2019.
Chris Hill: We're going to start with the stock of the day, and that's Snap. Miraculously, the stock of the day is Snap. Shares up 27% this morning. Snap's fourth-quarter loss was not as big as expected. That counts as a win for this business. They stopped the bleeding in terms of the user base. Look, for all the fun that we poke at Snap, I think that second one is both real and important. The two previous quarters, Snap was losing users. They stabilized that this time around.
David Kretzmann: Yeah. At least you've stopped the bleeding. Right now, you're at 188 million daily active users. The stock is up over 26% as we're taping this, but that really is just bringing it back to where it was in September. Not a ton to celebrate if you're one of those unfortunate Snap shareholders.
In the case of Snap, even though the loss was narrower than anticipated, I still don't see a whole lot to get excited about here. Over the past year, in 2018, the company burned over $800 million in cash. Right now, they're sitting at about $1.2 billion in net cash on the balance sheet. Maybe it's a little bit more than that. But, essentially, with their current cash burn rate, they just have a runway of about 18 to maybe 24 months with their current cash on the balance sheet. At some point, they're going to have to raise more money or really accelerate the pace that they're narrowing that cash burn. They're in a bit of a pinch. They're trying to do more. They went through a redesign of the app through 2018, trying to point users more toward publishers, stuff from media outlets like NBC, CNN. It seems like that's worked. They say that engagement is stronger. As we talked about, daily active users is stabilizing. But, still, that's a far cry beneath the engagement that you see with Instagram or Facebook. They're going up against titans in this space, and when you're burning money, still, at such a huge rate, and at this point, it's a win to just stop the bleeding, it's tough for me to get excited.
Hill: It is. To go back to the stock for a second, first, recognize that this is one of the most heavily shorted stocks in the public markets, so some healthy portion of this boost that we're seeing today is short-sellers saying, "OK, I'm going to go ahead and cover my short." And as you said, the stock is back to where it was in September. This is a company that went public two years ago. The IPO price was $17. It's up big today, and it's still under $9 a share. So, yeah, it's hard to get excited about this unless...they stopped the bleeding, but if they come out three months from now and start to show some actual growth, start to show an actual operating profit, then maybe the narrative changes. But for right now, this seems like one of those businesses where the clock is ticking and as you said, the clock is set for 18 to 24 months.
Kretzmann: Yeah. They're facing pressure in a lot of different ways. In the meantime, you're seeing engagement, users, continue to rise at a pretty incredible pace with Instagram, Facebook, these other social media platforms. For Snap, I agree with you, they really need to find a way to demonstrate to investors that they are keeping the platform relevant and making it increasingly relevant. That'll be something we track through daily active users, time spent on the app, things like that. This quarter, I guess, is a start. It's flat quarter over quarter. Hopefully, they can tick that up, and in the meantime continue to grow revenue, hopefully accelerate revenue, minimize losses, shrink that cash burn. That way, that at least buys them more time to continue to figure it out. But I still don't feel like they found the formula that'll make them a sustainable business at this point.