Snapchat, Inc. (NASDAQ: SNAP) is still boxing it out in the early rounds after entering the open market, post IPO. CEO Evan Spiegel and the company have attracted a huge outpouring of support, raising billions of dollars. Snapchat, Inc. on its own has never generated a billion dollars in annual revenue. Furthermore, its revenue has never exceeded its cost of revenue, aka, Cost of Goods Sold (COGS). In other words, to make $1 they have had to spend more than $1 on personnel and bandwidth (hosting). This is not a good selection for Basic Stock Investing basic stock investing.
"Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products. Hosting costs primarily include expenses related to bandwidth, computing, and storage costs. Cost of revenue also includes revenue share payments to our content partners, content creation costs, which include personnel-related costs, and advertising measurement services. In addition, cost of revenue includes inventory costs for Spectacles and facilities and other supporting overhead costs, including depreciation and amortization." - SEC PROSPECTUS
It is this upside down financial status that makes using the Return on Research Capital (RORC) metric difficult. The RORC can be used to show how much revenue a company returns on the previous years R&D, but in this case it's dwarfed by the COGS expenditure. Are the Snapchat Spectacles and other inventions bringing meaningful return when the hosting expense negates all profit? Perhaps they should buy their own datacenter before crafting more products? Well, Snapchat uses Amazon's (NASDAQ: AMZN) AWS server for a portion of its hosting and is contracted to do so until 2021.
Pair together the fact that Facebook (NASDAQ: FB) had once tried to buy Snapchat due to its threat level and the over-reliance on Amazon's hosting service; you get the theory Snapchat is just a goon for hire to bother Facebook. NBC bought $500 million worth of Snapchat's stock... the goon works multiple contracts.
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Return on Research Capital
The Return on Research Capital (RORC) metric looks at the R&D spending for a company and makes a correlation with the revenue for the following year. The following chart shows the 2016 RORC for Snapchat, Inc. and compares it to Twitter, Inc. (NYSE: TWTR) and Fitbit, Inc. (NYSE: FIT).
For every dollar of R&D spent by Snapchat, Inc. in 2015 they made $4.92 in revenue for 2016. Twitter, Inc. was lower in their return and Fitbit, Inc. returned the most with $14.46 for every dollar spent in 2015.
Saturday Night RORC and other stock analysis by Travis Brown can be viewed at Seeking Alpha. Click the follow option at the top header next to author's name. The feature will alert you to new releases. The author's profile lists past articles.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.