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Snap Inc.’s life as a high-growth young tech stock is over, and its rivals are about to show how much of that change is about Snapchat.
“From our recent conversations with our partners, it seems like advertising demand hasn’t really improved, but it hasn’t gotten significantly worse either,” Snap co-founder and Chief Executive Evan Spiegel told analysts in response to a question about headwinds and the broader macro-economy.
Brand advertising, one of Snap’s biggest revenue streams, was “significantly reduced” in the quarter and ad partners “are just managing their spend very cautiously so that they can react quickly to any changes in the environment,” Spiegel added. He also noted that Snap’s direct response business grew in the quarter.
Shares of Snap tumbled 15% in after-hours trading, while both Meta
META,
and Google parent Alphabet
GOOG,
GOOGL,
slipped but then slightly recovered. The entire internet sector has been under a triple whammy from Apple Inc.’s
AAPL,
privacy changes to iOS, competition from TikTok and advertisers looking to cut their spending.
Snapchat’s ad business could be especially ill-suited to the current environment, though. LightShed Partners analyst Rich Greenfeld contends that Spiegel’s comments about direct response ads actually bodes well for Meta, which he believes will show its earnings power this year as Snap and others struggle.
Spiegel was out in front of his rivals in laying off employees, announcing a 20% cut last summer that is effectively complete. Now, as revenue growth grinds to a decline, Spiegel is focusing on any profit metric he can find — after managing an adjusted net income through the magic of stock compensation in back-to-back years, he believes he has “a path to adjusted-Ebitda break-even in Q1” despite the revenue decline.
Snap finished 2022 with negative free cash flow, though. Google and Facebook are about to drop a lot of cash and earnings on the table with their reports this week, even with revenue-growth concerns. That will show just how big a gap exists with Snap, which will have a lot harder time dealing with TikTok and the rest of the industry’s issues, especially while predicting sequential user growth of roughly 2%.
“It seems that growth is something that investors will be asking about more than seeing, at least over the nearer term,” Scott Kessler, an analyst with Third Bridge, wrote in an email about Snap.
With no growth adding to no voting rights for investors and only fake profits, there is little to like about Snap shares, which are headed back for single digits after selling for $17 in the IPO and touching $80 in 2021. Judgment on the online-ad industry should wait for the bigger players to report.
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