Wednesday, March 7, 2018

Snap: Will Layoffs Be Enough?

Cheddar reported that Snap (SNAP) plans another layoff. This one actually appears meaningful and further signals that the company has major financial problems. Good companies don't conduct layoffs.

The report suggests that about 100 engineering employees are getting pick slips. The amount only counts for roughly 3% of the global workforce at the end of 2017 that stood at 3,069 employees.

The problem is that these cuts are counterproductive and not nearly enough to get Snap's financial house in order. The company burned $197 million in free cash flow during Q4 alone. Not to mention, the signal is that the recent updates were completely botched by the company.

The R&D costs were $233 million last quarter and about $102 million on a cash basis when excluding SBC. Even if the cut employees accounted for 10% of the costs, the $10 million reduction only gets Snap 5% closer to breaking even on a FCF basis.

The bigger problem is that layoffs have a horrible effect on employee morale. Snap could find itself having a difficult time hiring and retaining top talent. Not to mention, the revenue target for the year of $1.32 billion has to be in high doubt now.

The stock at $18 has a market cap of $25 billion and is far too expensive until their financial house is in order which may never happen. Continue to avoid this social media stock.

Disclosure: No position mentioned. Please review the disclaimer page for details. 

No comments: