Shares of Snap continued to plummet Friday, following analyst downgrades after the company missed lowered earnings expectations and warned of a tough macroeconomic environment.
More worrying still was the fact that the company did not issue future guidance after having revised expectations for the second quarter. This caused concern about the overall impact on the advertising-reliant companies and also caused several analysts to question the company’s leadership, even as CEO Evan Spiegel and his CTO Bobby Murphy re-upped their employment agreements through 2027.
“For starters, we have lost confidence in the company’s leadership team and their ability to forecast their business,” Moffett Nathanson analyst Michael Nathanson wrote Friday.
Nathanson downgraded the stock to “market perform” from “outperform” and lowered the price target to $9 from $19, saying he gives the stock a vote of “no confidence.”
Snap management is trying to stem the losses by cutting costs and slowing down hiring, while also making longer-term investments into augmented reality. But Guggenheim analysts said the lack of visibility around these initiatives caused them to rethink their investment thesis. The analysts lowered their rating to “neutral” from “buy” and cut their price target to $12 from $18.
“Management did note a focus on cost discipline as it pursues reinvigorated growth, but limited details and visibility, combined with the CEO’s failure to proactively address any analyst questions, have shaken our prior confidence,” the analysts wrote.
Shares of Snap closed down 39 percent Friday. The stock was joined by several others in the tech sector, including Meta, which closed down 8 percent, and Alphabet, down 6 percent.
This comes after Snap leadership pointed to several headwinds that impacted their advertising business, including inflation and economic concerns, which executives said is leading to a pullback in advertising across the sector, as well as increased competition for the advertising dollars that are left.
“Times are tough for Snap and it remains to be seen if many competitors and peers are seeing similar things,” said Scott Kessler, vice president and global lead for industrials materials and energy at Third Bridge.
Twitter also reported second-quarter earnings Friday and missed earnings expectations, citing advertising industry headwinds as well as pending litigation with Elon Musk over his takeover bid.
Nathanson downgraded Paramount to “underperform” from “market perform” on Friday, saying the stock was among the greatest at risk to lower advertising among traditional media ad formats.
Still, Kessler notes that Snap may be particularly susceptible among digital advertising-reliant companies. “Experts we’ve spoken with have told us that Snap’s focus and reliance on larger brand advertisers have made it more vulnerable to related budget cut-backs,” he said.
As Nathanson points out, Snap is also facing increased competition from TikTok in this area, and in terms of user numbers (Snap reported an 18 percent increase year over year in daily active users for the second quarter to reach 347 million and projects 360 million for the third quarter).
“In addition, 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,” Nathanson wrote. “Lastly, over the past few months, we have worried that the 2021 digital advertising base was filled with a bevy of young, unprofitable companies and that Snap might have been an unknowing beneficiary of this trend.”
Evercore ISI said that while it believes all internet advertising platforms will be impacted by the advertising downturn, the smaller platforms such as Snap will see more of an impact. It downgraded Snap to “in line” from “outperform” Friday and maintained a $14 price target.
“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,” the Evercore analysts wrote.
“Interestingly, the only mid-tier Internet advertising platform that may not be experiencing a material ad revenue slowdown is TikTok, where our very recent checks suggest both only a modest deceleration in growth and the attainment of well over 100% Y/Y growth,” the analyst team added.
In the recent past, Snap may have been able to capture some advertising dollars from Facebook, which may have delayed the overall impact on their business, but those advertisers now appear to have returned to Facebook, the analysts said.
