Debt Bet: Snap is selling convertible notes to investors to raise cash.

Debt Bet: Snap is selling convertible notes to investors to raise cash.

Santa Monica-based social media company Snap Inc. authorized the sale of $1.1 billion in convertible notes to a group of private investors on Aug. 9, gaining additional capital for operations and possible acquisitions.

The debt will be sold to private investors. Analysts said convertible notes are essentially a bet on Snap’s future success.

Many technology companies have raised debt rather than selling shares, which allows them to boost funds without potentially driving down their stock price.

Snap posted strong second quarter results this year, adding 13 million active users and bringing its total user base to 203 million people.

The company brought in more than $388 million in revenue during the second quarter, up 48% from $262 million in the second quarter of 2018. Prior to the quarterly earnings report, Snap had said it expected revenue of roughly $360 million.

Snap’s stock is up roughly 180% from this time last year.

If the company’s stock price doesn’t meet certain targets by August 2026, investors will be able to exchange their convertible notes for cash or stock (or both). Until then, they will collect a semiannual interest fee of 0.75%.

A source close to the matter indicated that the company is taking advantage of low interest rates to raise additional capital from institutional investors.

Snap said in a press release it will use the capital “for general corporate purposes, including working capital, operating expenses, and capital expenditures,” but also noted it “may also use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies,” or for a repurchase of stock.

The company said it does not have immediate plans to make any acquisitions or buy back stock at this time. Chief Executive Evan Spiegel said in a phone call with investors discussing the company’s second quarter earnings on Aug. 8 that Snap wants to expand its reach into augmented reality and virtual reality programming as well as in-app gaming and original video streaming.

“We look forward to building on our momentum and making significant ongoing progress in each of these areas,” Spiegel said.

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