Snap could run out of cash in 3 years because it is burning through $68 million a month

Reuters

Snap CEO Evan Spiegel.

• Snap has burnt through an average of $68 million a month since going public in 2017 and could, in theory, run out of cash in three years unless it turns a profit.
• It follows a difficult period for the company, including a wildly unpopular Snapchat redesign, a delayed update for Android users, and competitors like Facebook cloning features including Stories.
• Analysts are upbeat about the prospect of a turnaround. It is relatively easy for Snap to grow revenues or reduce costs.
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Snap is burning through so much cash it could run out of money in the next three years.

That's according to an analysis by the Financial Times, which did a deep dive on the company's finances and found that its average monthly cash burn - the rate at which outgoings outstrip revenue - is $68 million since it went public in 2017.

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The FT said Snap secured a tighter rein over its costs in the fourth quarter of 2018, which if maintained, could more than halve its burn rate to $33 million in 2019. Even at this lower rate, the FT said Snap will have three years to turn a profit before it would require a fresh injection of finance. It posted an operating loss of nearly $195 million in Q4.

That's the theory, at least. The FT relies on an assumption that nothing will change at Snapchat to increase its revenues. It is relatively easy for tech companies to bolt on new streams of revenue, like fees or advertising. However, in the long-term, the richness and delight of the user experience tends to be more valuable than short-term cashflow.

Critical to improving earnings will be raising user numbers, which have stalled spectacularly over the past two years. Daily active users stood at 186 million for the second quarter in a row in Q4, down 1 million on the same period in 2017.

It follows a wildly unpopular Snapchat redesign, persistent problems with its buggy Android app (which got a big update earlier this month), competitors like Facebook cloning features including Stories, and underwhelming sales of its Snapchat Spectacles. Snap has also suffered a management exodus, with around 20 executives abandoning the company since its IPO in March 2017.

Read more: Here are 20 senior executives who have abandoned Snap since its IPO less than 2 years ago

Analysts think 2019 will be a critical year for the company, which was founded in 2011 by Evan Spiegel and made him the youngest billionaire in the world.

"We believe 2019 remains a pivotal year for the company as it launches its rebuilt Android app globally, as its self-serve ad platform gains scale, and as the organization stabilizes after multiple executive departures," investment bank JMP Group said in a note to clients earlier this month.

"While we are encouraged with the company's new products and services, and our checks suggest engagement is improving, which bodes well for advertising growth, we think execution risk remains."

Snap held a Partner Summit in Los Angeles earlier this month, at which Deutsche Bank detected growing bullishness among the company's executives. Among other revenue-generating plans, the firm set out its ambitions to increase social gaming and integrate Bitmoji, Snap's custom emoji app, with third-party publishers. Deutsche Bank said it has "increasing confidence" in a turnaround.

Snap's stock has rallied nearly 8% over the past month, closing at $11.97 last Friday. In a note sent out to clients last week, RBC research analyst Mark Mahaney said shares of the camera company had a more than 40% upside.

Business Insider has contacted Snap for comment. We will update if we hear back.

Get the latest Snap stock price here.