Snap CEO Evan Spiegel has sold Wall Street his rose colored glasses, but when the effect wears off it’s going to hurt (SNAP)

evan spiegel

  • Snap investors initially cheered after it reported its quarterly results Tuesday.
  • The reaction was an indication of just how desperate many seem for some semblance of good news from the company.
  • Setting aside Wall Street and investor expectations, this wasn't a good report; Snap posted a huge loss and its user base is still smaller than it was a year ago.
  • What's more, the company seems to be underinvesting in areas that might help it grow in the future.
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You've got to give Evan Spiegel credit for one thing. 

Sure, his company, Snap, beat Wall Street's expectations with its first-quarter results. And yes, his company no longer seems to be in free-fall.

But, perhaps more importantly, he's managed to condition his shareholders to expect such bad things from Snap that when the company delivers even slightly-better-than-abysmal-news, his investors jump for joy.

That's what happened on Tuesday afternoon. In the immediate wake of the company's first-quarter report, Snap's stock soared 12%. Shareholders eventually settled down, and the stock was up a more modest — but still positive — 4% after the conference call.

Read this: Snap beat Wall Street's expectations for Q1 2019 but its user growth is still stalled

At first glance, there were a few things to cheer — or at least to not frown about. Snap's revenue grew 39% from the same period a year earlier, while the company cut its cash burn by 71%. After three straight quarters in which the user base for its Snapchat app either declined or stagnated from the prior period, sequentially, the app's number of users actually grew. And the company has finally opened up out the long-in-the-works Android version of its app to all users.

But the fact that such announcements sparked a buying frenzy — if only a short-lived one — is a good indication of just how beleaguered Snap's shareholders have become. Because viewed from some distance, this was not an impressive report.

Snap is still losing lots of money

Snap lost almost as much money in the quarter ($310 million) as it recorded in revenue ($320 million). Its daily active user count (190 million) is still a million users below what it was a year ago and only grew by 2% from the fourth quarter of last year. And even after the big reduction in cash burn, the company's free cash flow was still in the red to the tune of $78 million.

Dwell on those numbers for just a minute. This is a company that's been public for two years and in existence for more than seven. It has tens of millions of users. Its only immediate costs for providing the service are what it pays Google and Amazon each month to host its software. Other than its sideline business of selling video-camera glasses, it has no real physical inventory to maintain, no warehouses to operate, no supply chain to manage. Because its service is hosted by the big cloud operators, it doesn't even really have a data center to maintain.

And yet, at this late date, Spiegel and his team still hasn't figured out how to get Snap to generate cash — much less a profit.

Maybe they'll figure it out eventually. But after years of bleeding cash, disappointing investors, and frustrating users, there's good reason to doubt that. And the company gave investors more reason Tuesday to worry that they won't ever figure things out.

The company has been able to boost revenue essentially by convincing advertisers to allocate more of their budgets to its service. Worldwide, Snap saw about $1.68 in revenue for each of its users in the first quarter, which was up 39% from the same period a year ago.

But you have to wonder how long advertisers will continue to up their budgets — particularly to that extent — on a service that reaches fewer users today than it did a year ago.

Spiegel appears to be underinvesting in Snap's future

Snap's spending in the quarter is another cause for concern — and not for the reason you might think. 

Part of the way that Snap was able to cut its cash burn was by reducing or restraining the rise in some of its costs. Its spending on property and equipment plunged by 67%, and its sales and marketing budget fell 4%. Meanwhile, its research-and-development expenditures rose only 8%.

Normally, it's a good thing for companies that are losing lots of money to find ways to cut costs. But the cuts Snap made could come back to haunt it.

A company whose user base is stagnating might want to increase its marketing to lure in new users through marketing, rather than to cut it back. A company that faces stiff competition from a much-better funded rival — i.e., in the form of Facebook-owned Instagram — might want to be ramping up its research-and-development efforts to stay competitive.

Snap also reduced its cash burn by giving employees more of their pay in stock rather than cash. About 58% of its $216 million in Q1 R&D expenses was stock compensation. A year ago, the stock portion of its R&D was 49%.

That's a tried-and-true method in the tech industry for conserving cash. But it immediately dilutes current shareholders' stake in the company and reduces the company's earnings per share from what they would otherwise be. And many companies end up spending real cash later on to soak up all those shares they handed out to employees.

Of course, Snap investors would be lucky to have that problem, because it assumes that the app maker would be generating enough cash at some point to actually buy back its stock. And right now, it's still a long way from doing that.

SEE ALSO: Snapchat is stalling out, and there's not much hope that it'll get back on track

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Contributer : Tech Insider http://bit.ly/2DGbyTZ
Snap CEO Evan Spiegel has sold Wall Street his rose colored glasses, but when the effect wears off it’s going to hurt (SNAP) Snap CEO Evan Spiegel has sold Wall Street his rose colored glasses, but when the effect wears off it’s going to hurt (SNAP) Reviewed by mimisabreena on Wednesday, April 24, 2019 Rating: 5

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