Is Snap Inc. Snapping Back?

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Snap Inc building

After a strong fourth quarter earnings report on Tuesday, shares of Snap Inc. (NYSE: SNAP) soared to US$20.61 from US$14.05 in two days, a 46.7 percent increase.

An impressive increase on paper but still a modest improvement as the stock has been trading below its IPO price of US$17.00 since July 2017.

Congratulations to Snap for increasing revenue and its user base for 2017 for the first time in history. The most positive news from the report is that the company is now making enough money to cover their necessary expenses.

Even though that is still not enough, Snap performed better than predicted. Analysts were predicting that the company’s revenue would amount to US$252.8 million but actual revenue for the fourth quarter is US$285.7 million. Additionally, the app now has 187 million active users.

Snap, however, had a net loss of US$350 million and an operating cash flow of a negative US$735 million for the entire year.  While boasting a gross margin of 33 percent is nothing spectacular when compared to other social media giants such as Facebook, which has an 88 percent gross margin for its fourth quarter and Twitter which had a 64 percent gross margin for their third-quarter reports, Snap is rather proud of its improvement and its prospects for 2018.

Snap’s costly expenses can be traced back to the company’s lack of ability in building its computer network to run its app. Instead, the company outsources the computer power from Google and Amazon Cloud. This outsourcing takes up 70 percent of Snaps expenses to run its app.

Snap generates revenue solely from ad sales. However, with competition from Facebook, Instagram and Twitter, Snap still struggles to increase its revenue to a point where its sustainable enough to compete. Moreover, it is somewhat tricky for Snap to expand its reach to many users as it is said that the app functions better with the more expensive and up to date smartphones in areas where the mobile internet speed is fast.

While we do not recommend investors to buy Snap Inc, it doesn’t hurt to be updated on the progress the company makes and hopefully that can continue as 2018 progresses.

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