$1.2 billion spent to run Snap in six months

Snap (SNAP) may be forced to seek additional capital before the end of next year because it’s running out of money, according to a recent investor note by MoffettNathanson as cited by CNBC.

Snap’s cash and marketable securities stood at $1.6 billion at the end of June. The company needed $4.3 billion to run its operations in the whole of 2017. It spent $1.2 billion to finance its operations, including funding R&D (research and development) projects, in the first half of 2018.

Will Circumstances Compel Snap to Dilute Its Stock?

R&D takes up a large portion of revenue

Research is a key area for technology companies, and many spend large portions of their revenue on R&D. Baidu (BIDU) has said that it funnels ~15% of its annual revenue to R&D projects. Snap spent $1.5 billion on R&D in 2017, amounting to 186% of its revenue for the year. Facebook (FB) and Alphabet (GOOGL) spent ~20% and 15% of their 2017 revenues on R&D, respectively.

Loss narrowed from a year ago

If it comes to raising additional capital, Snap may have to issue new shares or borrow. But releasing large amounts of shares into the market could overwhelm demand and cause the price to come down. While borrowing money may not deliver a blow to its share price immediately, the interest associated with the debt could drive up expenses and eat into Snap’s profits.

Snap posted a loss of $353.3 million on revenue of $262.3 million in the second quarter. The loss narrowed from $443.1 million a year earlier. Twitter (TWTR) and Yelp (YELP) posted profits of $100.1 million and $10.7 million, respectively, in the same period.

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