Introduction
Snapchat is a leading mobile application that is used by millions of people all over the world. It was developed as a new social network offering a unique feature of sending pictures and stories that disappear after viewing or after a short period of time. Several tech giants attempted to buy Snapchat, but the owners opted to avoid acquisitions, generating funds from investors instead. This created a problem with valuation: although the value of Snapchat is estimated to be over $19billion, the company is only generating financial losses so far. The present paper will analyze the case of Snapchat to identify suitable options for resolving the problems that the company is facing.
Identification
Though Snapchat is a relatively recent application, it is popular and rapidly growing. The company is attractive to investors due to the fast development of its user base. Snapchat generates revenue from showing untargeted advertisements to users every 20 or 30 snaps, which amounts to 5-7 ads per day for active users. According to Snap, Inc., the company’s core strategy is “to invest in product innovation and take risks to improve [its] camera platform” (p. 5).
The company is trying to achieve this goal by spending a significant part of its funds on research and development. Nevertheless, attracting new investors may become more difficult as Snapchat’s losses are over four times higher than its revenues. Furthermore, Snapchat has no clear path to high income despite a large user base. Research and development costs are affecting the financial health of the business, and thus it is critical for the management to address the situation soon to prevent the venture from collapsing.
Analysis and Evaluation
To provide appropriate recommendations, it is critical to understand the extent to which the company’s problem affects its financial performance. Table 2 shows that the company’s current ratio is quite high, meaning that there are no significant liquidity issues. However, the return on assets is low, and the net profit margin is negative, and thus the company’s position in terms of revenue generation not favorable. The rapid decrease in net profit margin between 2016 and 2016 also demonstrates that the company’s expenses have increased disproportionately to its revenues. The capital structure of the company consists primarily of stockholder’s equity, which amounts to $2,992,327,000 (Snap, Inc. 65). This shows that Snapchat relies heavily on its investors despite incurring heavy losses.
Table 2. Ratio Analysis of Snapchat.
Although the financial performance of Snapchat is weak, the company still has some strengths, including its large and growing user base, which is particularly attractive to investors. It is also worth noting that the company operates independently of large tech companies and is dedicated to research and development. These features explain the beneficial competitive position of the company and the fact that Snapchat’s strategy is producing satisfactory results in terms of user activity. However, Snapchat does not capitalize on its strengths, and its position in the market could weaken if no steps towards achieving higher revenues are taken.
Recommendations
The main goal for Snapchat should be to become more profitable and secure its position in the mobile app market. The company faces competition from a variety of tech giants, such as Apple and Facebook, and thus it is critical for the management to determine and implement new ways of revenue generation. While advertising is often used by mobile applications as the main method of revenue generation, in the present case, it is not effective enough to achieve profitability. The recommended action plan would be to conduct market research to identify possible options of revenue generation and then create branded products or services that can be bought and used with the app.
The second recommendation is to reduce the costs associated with research and development or the general and administrative expenses. In order to do that, Snapchat should conduct an internal audit to determine processes or investments that do not contribute to strategy implementation or affect its revenues. Once this process is complete, the company should seek to eliminate these processes or reduce the resources spent on them. These recommendations will help to improve Snapchat’s profitability by reducing expenses and increasing revenues, thus making it more financially stable and competitive. Based on the information presented in the case, it is likely that the proposed plan will be accepted by the persons involved and that the organization will be able to implement it successfully.
Conclusion
Overall, Snapchat is a promising company that has a number of strengths, such as research and development initiatives, popularity among users, and excellent liquidity. Nevertheless, the analysis showed that Snapchat is not capable of making profits due to low revenues and high expenses. To solve this issue, it is essential for the company to review its expenditures and find new and innovative ways of generating revenue.