Messaging app firm Snap surprised expectations with its results yesterday – but analysts say the company has a long way to go before it turns the ship around.
Snap’s shares soared 30% after it revealed not just better financial results, but continued steady growth in its global user base, up from 178 million in the third quarter to 187 million in Q4 (albeit unaudited).
Revenue per user also rose, globally, from $1.17 in Q3 to $1.53 in Q4.
In fact annual revenue for the full year was up 104% on the previous year, and advertising revenue was up 74% year on year and 38% on the quarter – reflecting a 25% cut in pricing.
Cash running out
So why the continued doubts? Snap has been burning through its cash reserve at an alarming rate since it went public a year ago in one of the most publicised IPOs of 2017.
Market analyst Justin Pope says Snap “will need to make significant progress before its cash reserves run out”.
Writing on SeekingAlpah.com, he says Snap has continued to grow costs – hiring 100 new employees every month.
“Snap's largest issue is its cash burn. Whether you look at EBITDA [interest, tax, depreciation and amortisation], or cash flows, it remains a huge problem,” he said. “I cannot turn bullish on Snap until this is well on its way to being solved.
Need to cut costs
“The ultimate challenge for Snap, is that it needs to either outgrow its cash burn – which hasn't happened despite the Street going nuts over this quarter. Or, it needs to reduce its ‘input’ and cut costs – but can it grow by doing that?”
Pope says Snap has about $2bn in cash left, and in 2017 it burned through more than $819m – meaning the company would need to go back to its shareholders for more cash if things don’t improve.
Other analysts have also sounded warnings. Therese Poletti, writing on MarketWatch.com, said Snap’s growth had not lived up to expectations.
Revenue projections for 2018 of $2bn given at the time of the IPO have now been cut to $1.3bn.
Shunned by older users
“The California company has been extremely popular with teens and millennials, but it has not caught on with users older than 35,” she said – though a redesign to attract older users is in the pipeline.
“It took four quarterly reports from Snap before it finally managed to beat expectations and enjoy a big bounce, but it will have to do a lot more to live up to IPO expectations,” she added.
“Snap will need to execute on its promised redesign and continue boosting its user and revenue growth to come anywhere near the promise the startup once held.”