Should cash-strapped Snapchat sell out? To Netflix?

Should cash-strapped Snapchat sell out? To Netflix?

 

Snapchat needs a sugar daddy. Its cash reserves are dwindling from giant quarterly losses. Morale is poor from a battered share price and cost-cutting measures sap momentum. And intense competition from Facebook is preventing rapid growth. With just $1.4 billion in assets remaining at the end of a brutal Q3 2018 and analyst MoffetNathansonestimating it will lose $1.5 billion in 2019 alone, Snapchat could run out of money well before it’s projected to break even in 2020 or 2021.

So what are Snap’s options?

A long and lonely road

Snap’s big hope is to show a business turnaround story like Twitter, which saw its stock jump 14 percent this week despite losing monthly active users by deepening daily user engagement and producing profits. But without some change that massively increases daily time spent while reducing costs, it could take years for Snap to reach profitability. The company has already laid off 120 employees in March, or 7 percent of its workforce. And 40 percent of the remaining 3,000 employees plan to leave — up 11 percentage points from Q1 2018 according to internal survey data attained by Cheddar’s Alex Heath.

October 28, 2018

Snapchat is relying on the Project Mushroom engineering overhaul of its Android app to speed up performance, and thereby accelerate user growth and retention. Snap neglected the developing world’s Android market for years as it focused on iPhone-toting US teens. Given Snapchat is all about quick videos, slow load times made it nearly unusable, especially in markets with slower network connections and older phones.

Looking at the competitive landscape, WhatsApp’s Snapchat Stories clone Status has grown to 450 million daily users while Instagram Stories has reached 400 million dailies — much of that coming in the developing world, thereby blocking Snap’s growth abroad as I predicted when Insta Stories launched. Snap actually lost 3 million daily users in Q2 2018. Snap Map hasn’t become ubiquitous, Snap’s Original Shows still aren’t premium enough to drag in tons of new users, Discover is a clickbait-overloaded mess, and Instagram has already copied the best parts of its ephemeral messaging.

As BTIG’s Rich Greenfield points out, CEO Evan Spiegel  claims Snapchat is the fastest way to communicate, but it’s not for text messaging, and the default that chats disappear makes it unreliable of utilitarian chat. And if WhatsApp were to add an ephemeral messaging feature of its own, growth for Snapchat could get even tougher. Snap will have to hope it can hold on to its existing users and squeeze more cash out of them to keep reducing losses.

All those product missteps and market neglect have metastasized into a serious growth problem for Snapchat. It lost another 2 million users this quarter, and expects to sink further in Q4. Even with the Android rebuild, Spiegel’s assurances for renewed user growth in 2019 seem spurious. That means it’s highly unlikely that Snapchat will achieve Speigel’s goal of hitting profitability in 2019. Snap did successfully reduce the rate of its free cash flow burn from a loss of $234 million in Q2 2018 to a loss of $159 million in Q3, adding to analyst MoffettNathanson’s projections for its run. But unless Snap bounces back, it will still need either an investor or acquirer to come to its aid by 2020.

 

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