Its IPO left cash on the table that it desperately needs.

August 14, 2017

Its first trick was making selfies disappear. Its latest is sending gargantuan piles of cash into the ether.

On August 10, Snap announced second quarter revenues, earnings, and growth in new customers that fell below analysts’ predictions, sending its already tanking stock down additional 10% by midday Monday, August 14. Despite trailing forecasts, Snap’s sales for the three months ended June 30 rose $110 million, or 152%. Its expenses, however, far outpaced the surge in revenues, leaping from $442 million, or 280%, led by huge increases in R&D and sales and marketing.

To fill that chasm, Snap is burning gigantic amounts of cash. For the 12 months ended in June, it devoured $747 million in cash to fund its operations. But that’s not nearly the total. Snap is an increasingly 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. All told, Snap spent around $333 million in acquisitions in from Q2 ’16 to Q2 ’17.

Over that twelve-month span, the combined cash outlays on operations and acquisitions totaled almost $1.1 billion. That deficit is likely to keep growing for many quarters ahead. The gap between revenues and costs continues to expand. And the deals keep coming. In July, Snap bought Placed, whose software tracks purchases for advertisers, for $135 million.

So the cash burn will only intensify. Hence, a gigantic cash cushion is essential to furnish Snap a long runway. The time required to lure the multitudes needed to make its photo-sharing product profitable is highly uncertain, and became a lot less predictable following the dreary Q2 results. In March, Snap’s vaunted 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. That figure isn’t nearly as comforting as it sounds. 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 (assuming that it will keep to maintain around $500 million to fund its daily operations).

The cash issue calls into question Snap’s handling of its IPO. As usual, the institutions got a sweet deal. The underwriters pre-sold the shares at $17, far less than big investors were willing to pay. (Snap 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.

Of course, 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. And that number is at least $24. So 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%.

Instead of its current $2.8 billion in cash, 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.

As the big selloff has proven, the investors who got a deep discount weren’t loyal after all. Because it left $1.1 billion in the table, Snap needs achieve profitability far faster than if it had reaped what was then full value from its IPO. What looked like a fantastic cash cushion five months ago isn’t looking so comforting now. Snap needs to beat the cash clock, and right now, it’s losing the race.

 

 

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