Shares of Snap Inc. and its peers tumbled on Friday, as Wall Street reeled from what were described by one aghast analyst as “terrible” results and downgrades rained down on the Snapchat parent.
Snap shares
SNAP,
skidded by as much as 39.3% through 1 p.m. Eastern on Friday, threatening to put up their second biggest one-day percentage decline in the stock’s history, though it would also be its second biggest in the past two months — shares plunged 43.1% in May after Chief Executive Evan Spiegel warned Wall Street that the second quarter would be bad. Snap, which began this year with a market capitalization of nearly $76 billion, has seen nearly $60 billion of that valuation wiped away, a decline of 78%.
Other social-media and online-ads companies also felt the pain, as fears about the industry that many analysts had already voiced managed to multiply. Pinterest
PINS,
stock fell as much as 14.4%, shares of Facebook parent Meta
META,
fell declined as much as 7.8%, ad-tech company The Trade Desk
TTD,
plunged as much as 9% and Google parent Alphabet Inc.
GOOGL,
GOOG,
dropped as much as 6%. Twitter Inc.’s
TWTR,
Friday morning earnings report seemed to confirm fears about online-ad revenue, though its stock bounced back after the company blamed Elon Musk for its tough quarter.
Snap reported revenue that fell short of expectations late Thursday, while executives declined to provide a financial forecast and spoke of a second quarter that was “more challenging than we expected.” Snap had already warned weeks back that it was bracing for disappointing performance.
The company is dealing with issues unique to the evolving social-media landscape as well as a broader macroeconomic storm. Not only does the company have to deal with TikTok’s ascent and lingering App Tracking Transparency (ATT) impacts from Apple Inc.’s
AAPL,
privacy-related changes, but it also must contend with an ad-market slowdown.
Snap’s stock, which was on track to trade at the lowest prices seen since April 2020, has plunged 65.2% year to date through Thursday, while the S&P 500 index
SPX,
has lost 16.1%.
Opinion: Snap’s board creates a unique dividend meant to ensure its founders stay in control
“Results suggest a significant deterioration in advertiser demand, which will likely weigh on the sector,” Piper Sandler analyst Thomas Champion wrote in a note to clients late Thursday.
He maintained a neutral rating on the shares, which have fallen 65% so far this year, while cutting his price target to $11 from $18.
“This stock faces a grim outlook near-term with the traditional growth algorithm in hiatus,” he wrote. “While still grappling with ATT recovery, the ad market appears to be worsening rapidly. It may well take till ’23 before growth gets back on track.”
While roughly half of the analysts tracked by FactSet still have bullish ratings on Snap’s stock, a number of them jumped ship in the wake of Thursday’s disappointing showing.
“When fundamentals change this dramatically, it’s hard for us not to change our investment opinion, however belated the call,” said a team at Evercore led by Mark Mahaney, who cut their rating on Snap’s stock to in line from outperform and slashed their price target to $14 from $26 a share.
The Evercore analysts cut estimates on the company by 25% or more, saying that while they “remain constructive on Snap’s long-term fundamentals,” strong user growth, and monetization opportunities, the stock has few catalysts over the next six months to a year.
“We will await a stabilization in revenue growth before considering getting more constructive,” they added.
Perhaps more damning was a downgrade from a team at MoffettNathanson led by Michael Nathanson, who appeared to be positively seething as he cut his rating to market perform.
“Dear clients, we rarely ever decide to downgrade a stock right after a terrible earnings print especially after a series of terrible prints, but this time is different,” said Nathanson and the team, who said they’ve “lost confidence” in the company’s ability to forecast its business.
“Putting it all together, given the losing hand that Snap is now facing combined with the apparent lack of valuation support and the need to preserve free-cash flow, absent a takeout, there really does not appear to us a compelling reason to buy this stock,” Nathanson and his team wrote.
Among other gripes, the analysts said that “after spending many years denying that competition from TikTok is an issue, it may turn out that Snap’s usage and advertising growth is actually far more challenged than they knew.”
Justin Patterson and a team of analysts at KeyBanc Capital Markets cut Snap to sector weight from overweight, saying the social-media company’s results are “rapidly diverging from the industry.”
“Whereas Snap cited macro softness, comments from ad agencies suggested 1H and the start of 3Q were fine. We believe this demonstrates: a) competitive issues with incumbents, TikTok, and Apple; and b) ad price volatility given a more narrow advertiser base,” wrote Patterson and the team.
Patterson said Snap’s issues could linger as investors await signs that the company’s efforts on measurement and product can yield results.
Brian Fitzgerald of Wells Fargo joined the downgrade parade, positing that Snap’s report “prompts the question of where growth may bottom as/if the macro continues to weaken from here.”
Still, he didn’t think economic issues were entirely to blame for Snap’s struggles. “While the macro has clearly been the leading factor in SNAP’s top-line decel, we believe overexposure to economically sensitive verticals and competitor share gains have also factored in—shaking our conviction on fundamentals and, in particular, SNAP’s ability to resume a 50%+ revenue growth trajectory,” Fitzgerald wrote. He cut his rating on Snap to equal weight from overweight and slashed his price target to $14 from $27.
Rosenblatt Securities analyst Barton Crockett commented that “the rapidity with which Snap’s revenue growth has evaporated is stunning.” Snap called for years of 50%-plus revenue growth at an early 2021 investor day, but that momentum only lasted three quarters, he noted.
He downgraded the stock to neutral from buy while trimming his price target to $14 from $23.
As for Snap’s macro woes, investors should brace for all internet advertising platforms facing that music, said Evercore analysts.
“It’s our belief, however, that SNAP, PINS and TWTR will likely experience much greater impacts than META and GOOGL as marketers seek to consolidate ad budgets with the largest, performance marketing-oriented platforms. We believe this is a key factor behind the increased competition that SNAP is experiencing,” he said.
