Snap Inc.’s stock dropped sharply Friday as Wall Street took a hard look at the company’s latest string of disappointing news, which has the potential to rattle the broader internet sector as well.
Shares of the Snapchat parent
SNAP,
were off more than 30% in morning trading Friday following the company’s latest earnings report, but sharp stock moves have become familiar to Snap investors this year. Should the current declines carry through to the close, Snap shares would log their worst single-day percentage drop since July 22, when they lost 39%. The stock’s record decline was a 43% plunge suffered after a profit warning in May.
Fellow internet stocks scurried after Snap, with Pinterest Inc.
PINS,
down 5.7%, Facebook parent Meta Platforms Inc.
META,
off 2.8%, and Roblox Corp.
RBLX,
down 2.1%. Shares of Alphabet Inc.
GOOG,
GOOGL,
which owns Google, were off about 0.5%.
Snap announced its first share-buyback program along with the Thursday afternoon report, but revenue for the latest quarter came up slightly shy of Wall Street’s mark and constituted the slowest growth on record. Snap executives seem to expect further pain during the holiday season: In a letter to shareholders, they said ad partners were decreasing marketing budgets because of inflation-driven headwinds and cost pressures.
Executives declined to provide a full forecast for the fourth quarter, simply telling investors that forward visibility “remains incredibly challenging.”
While expectations were low going into the results given the stock’s sharp year-to-date plunge, Snap seems to have “lost all momentum,” said AB Bernstein analysts Mark Shmulik and James McNeil, who cut their rating on the stock to market-perform from outperform and slashed their price target to $9 per share from $15.
“Even the usually reliable engagement trends showed cracks, with time spend down in the U.S. A premature 8K and a non-guide guide only led to investor confusion, despite management’s transparency intentions,” the analysts told clients in a note.
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Snap shares rallied in late August after the company put out a filing confirming job cuts meant to help slash costs but calling out surprise sales growth. Some analysts had increased expectations for the social-media group based on the sentiment from that filing.
The company’s 5% year-over-year drop in U.S. “time spent” was a common sore point among exasperated analysts. “Snap needs to rapidly fix its engagement issue,” said a team of analysts at Evercore led by Mark Mahaney. He kept an in-line rating on the shares but dropped his price target to $14 a share from $17 and cut estimates.
The Evercore team said Snap faces headwinds related to the macroeconomy, platform-related changes and competition from Google, Facebook and TikTok. On the platform front, the analysts flagged the continued effects of Apple Inc.’s privacy-related changes that have complicated ad tracking.
Another downgrade came from MKM Partners’ Rohit Kulkarni, who lowered his rating on Snap to neutral from buy and moved to a fair-value estimate of $10 from $15. He said he “overestimated Snap management’s resilience to macro/Apple headwinds in 2022, and in turn, this inability has amplified micro weakness in its business.”
“We now believe Snap will have difficulty remaining under control of its own destiny over the next six to nine months,” said Kulkarni. His rationale is that many advertisers view Snap as an “experimental platform,” meaning that marketers could be likely to trim their budgets on this sort of platform first amid economic weakness. He also said Snap is showing “critical share loss to TikTok,” while the company has several management holes to fill that could complicate its ability to execute over the medium term.
As for the competition and those canary-in-the-coal-mine fears, Snap management’s revelation of weaker brand spend could be a cautious signal for Twitter
TWTR,
and Alphabet-owned YouTube, said the analyst.
Twitter shares were also under pressure on Friday, though it was unclear how much that action was related to Snap’s commentary on the ad market. Twitter is in the process of being acquired by Tesla Inc.’s Elon Musk, but a report indicated that the U.S. administration could be mulling a probe of Musk’s ventures, including his pending $44 billion deal for the company.
Evercore’s Mahaney agreed that Snap earnings bode potentially negative for the internet ad sector, but he saw most of the disappointing headlines as company specific. For example, Meta and Alphabet are bigger and could be seeing the effects of “consolidation of ad spend.” Alphabet is also among the companies that deliver “highly measurable conversions,” along with Amazon.com Inc. Those sorts of companies could be better positioned.
He further feels that Snap is being hurt by its management gaps.
Mahaney is cutting his Snap revenue estimates for 2023 by 10%. “The headwinds for META and GOOGL are likely to be notably less severe and the headwinds for PINS are likely to be modestly less severe than they are for Snap,” he said.
Brad Erickson and Logan Reich of RBC Capital Markets said that in previous quarters, bad Snap news proved “a bit of a red herring” when it came to the larger sector, and recent checks didn’t indicate “as meaningful macro headwinds” for the broader industry.
Still, the pair trimmed estimates and lowered their price target to $8 from $11, keeping a sector rating. “We remain sidelined as we’ve not seen evidence the platform can drive differentiated conversion and compel incremental dollars. We need to see evidence SNAP can drive more durable spend that is less susceptible to macro pressures,” they said.
The current average price target for Snap is $10.99, down from $13.95 at the end of September, according to FactSet. And Global Equities Research, for now, has the lowest price target — $3, with a sell rating.
