Will Rihanna Tete-A-Tete Crush Snap?

A few weeks ago pop star Rihanna and Snapchat (SNAP) made major headlines. Snapchat ran an advertisement for a game called "Would you rather." The game poses tough questions to its participants. The choices the Snapchat ad gave were "Slap Rihanna" or "Punch Chris Brown." Brown pleaded guilty in 2009 to assaulting Rihanna during an argument when they were dating.

Rihanna criticized Snapchat on social media for animating something that would intentionally bring shame to domestic violence victims, and making "a joke of it."Snapchat removed the ad from its platform and also admitted the advertisement was approved in error:

"The advert was reviewed and approved in error, as it violates our advertising guidelines. We immediately removed the ad last weekend, once we became aware. We are sorry that this happened."  

Snap's share price fell by over 5% after Rihanna's criticism went public, wiping out over $800 million of its market value. The criticism has been a public relations nightmare for the company. Rihanna has millions of fans, and I would wager that many of them are avid users of social media, including Snapchat. Secondly, amid the "Me Too" movement women are fighting back against violence and harassment. This is the wrong time to make light of it. That said, the Rihanna Tete-a-tete is just one of many of Snapchat's problems.

Snapchat Is Hemorrhaging Cash

When I first heard about Snapchat's exploding videos a few years ago I thought it was a neat idea. It could save teens the embarrassment of having their videos seen by people other than who they were intended for. Just because something is a neat idea does not necessarily mean it should be a publicly-traded company. Snapchat went public a year ago. Its revenue has grown, but like most start-ups Snapchat is hemorrhaging cash.

In Q4 2017 its revenue of $286 million was up 72% Y/Y. Its daily average users (DAUs) of $187 million rose 18%; growth in average revenue per user ("ARPU") rose 46% and outstripped 6% growth in cost of revenue per user ("CoRPU"). Snapchat is growing its infrastructure in order to sell more ads and generate new revenue opportunities. Its R&D and SG&A expenses more than doubled versus the year earlier period. EBITDA and cash flow suffered for it. Snapchat generated EBITDA of -$342 million, down from -$159 million in Q4 2016.

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