Over the last two days, Facebook (FB) and Twitter (TWTR) have both disclosed -- not surprisingly, given how the COVID-19 pandemic has respectively impacted ad spending and digital media consumption -- that they've seen user activity spike and ad sales come under pressure in recent weeks. Odds are pretty good that Snap will report seeing similar trends.
But from a financial standpoint, there are a few reasons why Snap's income and cash-flow statements are likely to come under pressure to a greater degree than Twitter or (especially) Facebook's. Specifically:
- Snap, unlike Facebook or Twitter, was cash-flow negative going into 2020. Free cash flow (FCF) was negative $76 million in Q4 and negative $341 million for the whole of 2019.
- Facebook revealed on Tuesday that it has seen messaging and voice/video calling activity rise significantly in countries heavily impacted by the COVID-19 pandemic. A large percentage of Snapchat activity involves messaging or video calling.
- Unlike Facebook and Twitter, which largely rely on their own data centers to support their services, Snap heavily relies on Alphabet/Google (GOOGL) and Amazon.com's (AMZN) public cloud infrastructures, and pays them a margin along the way. Infrastructure expenses equaled 34% of Snap's 2019 revenue.
- As of Q4, 70% of Snap's daily active users (DAUs), and 84% of its revenue, came from North America and Europe.
For these reasons, a combo of sharply declining ad spending and sharply rising digital media consumption in North America and Europe is likely to result in Snap seeing considerable cash burn over the near-term. When the dust settles, this year's FCF could be a lot worse than 2019's.
Fortunately, Snap did have $2.1 billion in cash on its balance sheet at the end of 2019, thanks in part to a $1.265 billion convertible debt offering carried out last summer.
And like various other companies that are seeing strong activity/traffic growth at this time, there could be a long-term benefit to the elevated usage Snapchat is (from all indications) seeing right now, if some meaningful portion of consumers spending more time on Snapchat right now don't bring their activity all the way back to prior levels after conditions have improved.
But with that said, Snap investors should be prepared to see the company witness substantial cash burn over the next few months.