When Snap (NYSE: SNAP) filed its IPO registration with the SEC, it revealed that it recently signed a $2 billion deal with Google, the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary, to use its cloud platform to support Snapchat. Snap then went out and signed a $1 billion deal with Amazon (NASDAQ: AMZN) to use Amazon Web Services for additional cloud hosting.
These contracts have certain stipulations that require Snap to spend a certain amount with each company every year through 2021. And while they’ve been very beneficial to Snap’s hosting costs per user, Snapchat’s sluggish user growth puts a big question mark over whether Snap will meet its spending commitments with Google and Amazon.
Snap’s commitments with Google and Amazon are a bit different. The Google deal is for a relatively flat amount every year while the Amazon deal ramps up each year.
*Snap can defer up to 15% of the amount to a subsequent year
The deals make it so Snap is committed to spending a bare minimum of $390 million on hosting fees this year. Snap’s hosting fees for the first and second quarters were $99 million and $106 million, respectively. Those amounts will continue to climb as Snapchat adds more users and features, so it seems like Snap will hit the bare minimum this year.
But Snap discloses its commitments in its 10-Q every quarter, and it says it still has $243 million left in contractual hosting commitments for 2017. That’s down from $350 million in the first quarter. Snap’s commitment disclosure implies that it doesn’t plan on using any of the slack in its Google contract to defer its hosting costs at this point. But it also implies a significant ramp in cloud spending over the second half of the year, and it’s unclear if Snap’s data usage will climb that much. If it doesn’t, it will have to push back some of its commitments into the next year, raising the bar for user growth and increased engagement on Snapchat.
If Snap fails to meet its minimum obligation with Google, it forfeits any amount below that 15% buffer. Amazon’s deal is a bit more lenient in that it allows Snap to prepay for AWS hosting to meet the minimum commitment.
Snap doesn’t necessarily need all of its hosting costs to come from users. It could come from its customers. Snap launched its self-serve ad platform earlier this year and it’s rolled out several new tools to make it easier for small businesses to create, target, and measure ad performance on Snapchat.
Snap is aggressively courting businesses to its automated ad buying platforms and that could help make up some of the gap in cloud hosting costs in the second half of the year. All of those video ads and measurement data need to be stored somewhere.
That said, it’s not clear how great of a return Snap is getting on its self-serve ads. Management noted the auction format of its automated ad buying platform resulted in lower average ad prices for Snapchat in the second quarter. It expects ad prices to rebound in the long run, however, as more businesses join the auction for ads. But it could incur a lot of expenses, including hosting fees in the meantime, as it onboards a lot of new customers.
It’ll be interesting to see if Snap actually uses the full $400 million commitment to Google in 2017. Investors should keep an eye on any disclosure in the third or fourth quarter about deferring some of its commitment to 2018. It does have some leeway, but unless it starts attracting a lot of new users and a lot of new advertisers, it might have to admit it’s bitten off a bit more than it can chew.
10 stocks we like better than Snap Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Snap Inc. wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.
- Google Cloud IoT Reviews and Pricing - 2018 - July 12th, 2018
- Cloud Hosting Plans - Secure & Scalable Services | HostGator - May 18th, 2018
- Best cloud hosting providers in 2018 | TechRadar - May 14th, 2018
- Cloud Hosting - Cloud - Windows - March 2nd, 2018
- Cloud Servers | Cloud Hosting | Web Hosting - Cirrus Hosting - February 20th, 2018
- Managed Dedicated, Cloud and Hosting Services - February 20th, 2018
- What is Cloud Hosting? | Web Hosting Sun - February 12th, 2018
- Cloud Hosting - Managed Cloud Services - January 9th, 2018
- Cloud Hosting by Perry Hosting - December 11th, 2017
- What Is Cloud Hosting? | GoDaddy - YouTube - December 11th, 2017
- Linux VPS | Best Managed Linux Cloud Hosting - RoseHosting - November 24th, 2017
- Cloud hosting platforms. Part one: Pantheon | ADCI Solutions - November 24th, 2017
- Get to know Linode, the new (big) kid in town - Technical.ly - September 7th, 2017
- 500 Cloud Operators, Managed Service Companies and Hosters to Gather at the 13th Annual Hosting & Cloud ... - Benzinga - September 7th, 2017
- Cloud ERP: The rising alternative to hosting your own - Networks Asia - September 7th, 2017
- Melbourne Server Hosting Renamed to iomart - Web Host Industry Review - September 6th, 2017
- Cloud ERP: The rising alternative to hosting your own - CIO Australia - September 6th, 2017
- Dean Dorton Technology named to Sage Intacct President's Club, Rookie of the Year and New Partner of the Second ... - The Lane Report - September 6th, 2017
- Microsoft Signs Deal to Put More Apps on Huawei's Cloud in China - eWeek - September 6th, 2017
- Cloud Hosting Providers CommsTrader's UK Channel Guide 2017 - CommsTrader - September 5th, 2017
- Huawei announces Microsoft cloud apps partnership - ZDNet - September 5th, 2017
- Trump Effect Could Cost US Cloud Providers Over $10 Billion: Report - Web Host Industry Review - September 2nd, 2017
- Cost Reduction Strategies on Java Cloud Hosting Services - InfoQ.com - August 30th, 2017
- Cloud Native The Perfect Storm for Managed SD-WAN Services - Network World - August 30th, 2017
- Why 2017 is the Year to Understand Cloud Computing - Business 2 Community - August 28th, 2017
- President Trump Could Cost US Cloud Computing Providers More Than $10 billion by 2020 - The Data Center Journal - August 28th, 2017
- What You NEED To Look For In A Cloud Hosting SLA - TG Daily (blog) - August 27th, 2017
- President Trump Could Cost US Cloud Computing Providers More ... - The Data Center Journal - August 27th, 2017
- State of Cloud - 2017 - Read IT Quik - August 22nd, 2017
- President Trump could cost US cloud computing providers more than $10 billion by 2020 - Bdaily - August 22nd, 2017
- Microsoft No Longer a PC Company with Deals Like Halliburton, Says Credit Suisse - Barron's - August 22nd, 2017
- Right Networks continues focus on tech improvement with new CIO - Accounting Today - August 21st, 2017
- Altinity Provides Cloud Version of ClickHouse on Kodiak Data MemCloud - Markets Insider - August 21st, 2017
- NASA calls on cloud for online eclipse streaming - GCN.com - August 21st, 2017
- Cloud Hosting Reviews and Comparisons | Cloud Hosting Directory - August 19th, 2017
- Free cloud hosting: comparing the top providers offer - August 19th, 2017
- Microsoft Expands HPC Cloud Portfolio With Cycle Computing Acquisition - eWeek - August 19th, 2017
- UC San Diego Health: Moving Its EHR to the Cloud, Strategically - Healthcare Informatics - August 19th, 2017
- Rackspace's first in-house attorney for international moves on - San Antonio Business Journal - August 19th, 2017
- Microsoft Acquires Cycle Computing to Bulk Up its HPC Cloud Services - eWeek - August 18th, 2017
- Massive Potential Attracts International Players to Iran's Cloud Computing Market, Despite Challenges - PR Newswire (press release) - August 18th, 2017
- These Inventors Need To Conquer Cryptocurrency To Change Cloud Computing - Celebrity Net Worth - August 18th, 2017
- 360 Cloud Solutions now offers Adaptive Insights - Accounting Today - August 18th, 2017
- Hackers breach third party cloud vendor TekLinks - Healthcare IT News - August 18th, 2017
- Stronger security and disaster planning fuel healthcare's migration to the cloud - Healthcare IT News - August 16th, 2017
- Hackers hit dermatology practice through cloud vendor - Information Management - August 16th, 2017
- Hackers hit dermatology practice through cloud vendor - Health Data Management - August 15th, 2017
- Unisecure Hybrid Cloud Hosting Introduces New Integration And Collaboration Support. - HostReview.com (press release) - August 14th, 2017
- CenterGrid Names Kevin Westendorf As Chief Technology Officer - Markets Insider - August 14th, 2017
- Earth911.com - Earth911.com - August 14th, 2017
- Commerce Department Plans to Move Cybersecurity to the Cloud - FedTech Magazine - August 13th, 2017
- Snap CEO Evan Spiegel Makes A Case For Slow User Growth - Fortune - August 11th, 2017
- RiverMeadow and WSM Announce Agreement to Facilitate Cloud Migrations - GlobeNewswire (press release) - August 11th, 2017
- Driving operational excellence with your cloud vendors - Network World - August 10th, 2017
- Amazon jumps on Kubernetes bandwagon - ZDNet - August 10th, 2017
- Epic Move: UC San Diego Health Transitions to Cloud Technology - UC San Diego Health - August 10th, 2017
- St. Cloud to Host Summer Sizzler Downtown Art Crawl - WJON News - August 10th, 2017
- Cloud management platforms offer a unified approach to hybrid IT - TechTarget - August 10th, 2017
- CA Health System Begins Cloud-Based Epic EHR Implementation - EHRIntelligence.com - August 10th, 2017
- Home Office seeks partner for AWS switch after current hosting ... - www.channelweb.co.uk - August 9th, 2017
- Planning Your Journey to the Cloud - TV Technology - August 9th, 2017
- Marias Technology adds Microsoft Azure to its Hosting Services - GlobeNewswire (press release) - August 9th, 2017
- IBM CIO leaves for AWS and Big Blue flings sueball to stop him - The Register - August 9th, 2017
- How To Win at Cloud Hosting in a Microsoft-AWS-Google World - Redmond Channel Partner - August 8th, 2017
- Epic Move: UC San Diego Health Transitions to Cloud Technology - Newswise (press release) - August 8th, 2017
- Global Health wins contract to deploy cloud system at Sydney hospital - Proactive Investors Australia - August 8th, 2017
- As Tech Execs Rally Around Kushner, Government Cloud Adoption Still Has Ways to Go - Windows IT Pro - August 8th, 2017
- Heavy clouds in IT world make it rain gold for UPS box manufacturers - The Register - August 8th, 2017
- Project Manager - Amazon, Google, Microsoft Cloud Hosting - Dorking and Leatherhead Advertiser - August 6th, 2017
- From Public Cloud to Hybrid IT Straight From the Horse's Mouth - InfoWorld - August 6th, 2017
- How companies can boost their website in China's clouded market - Cloud Tech - August 4th, 2017
- Cloud computing facility launched - Times of India - August 4th, 2017
- Aerohive Achieves Unmatched Scale and Flexibility in Cloud-Managed Networking - Patch.com - August 4th, 2017
- 'UK cloud services are strong and ready to compete with the world's best tech economies', Cloudreach CEO says as ... - Data Economy - August 3rd, 2017
- Marijuana startup Lemonhaze leverages Bizspark to jump from AWS to Azure - OnMSFT (blog) - August 3rd, 2017
- US retailers increasingly switching to public cloud hosting to free up resources to develop new services - InternetRetailing.net - August 2nd, 2017
- Mozilla's Send is basically the Snapchat of file sharing - The Verge - August 2nd, 2017
- Why Facebook Is Withdrawing WhatsApp from the IBM Cloud - Market Realist - August 2nd, 2017
- You need a cloud exit plan, even for AWS, Google, Microsoft, or IBM ... - InfoWorld - August 2nd, 2017
- Cloud Hosting - Cloud Web Hosting Services - Bluehost - August 1st, 2017