Snap’s Earnings Trigger a Crash in Social Media Stocks, Yet Again

Social media stocks are trading lower in US premarket price action today after Snap’s Q3 2022 earnings spooked investors. It is the third consecutive quarter when Snap’s earnings have triggered a collapse in social media stocks.

Snap reported revenues of $1.13 billion in the quarter, which was slightly below the $1.14 billion that analysts were expecting. Its revenues rose 6% YoY which is the slowest pace of growth since it went public in 2017.

Revenues of other social media companies have also stalled. In Q2 2022, Meta Platforms reported a YoY decline in revenues, its first as a publicly traded company. The Mark Zuckerburg-led company predicted a YoY fall in its Q3 revenues as well.

Snap’s earnings were better than expected

Coming back to Snap, while its revenues trailed estimates, it posted a surprise adjusted profit of 8 cents per share. Analysts were expecting it to post a small per-share loss in the quarter. However, the company’s net losses rose five-fold to $360 million. Among others, a $155 million restructuring expense led to the massive loss.

Earlier this year, Snap announced a 20% reduction in its headcount. In the third quarter, it incurred significant expenses toward severance costs. Meta Platforms has also laid off some employees and has gone slow on hiring. Zuckerburg has said multiple times that the company is overstaffed. Other Big Tech companies are also feeling the heat from the economic slowdown and have either laid off employees or cut back on hiring.

Key takeaways from Snap’s earnings

Meanwhile, the surprise adjusted profit failed to cheer investors and Snap shares look set to fall towards a new 52-week low in today’s price action. While the company’s daily active users increased 19% to 363 million, the ARPU (average revenue per user) plummeted 11% to $3.11.

In its shareholder letter, Snap said, “Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition.”

It added, “We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital.”

The guidance also spooked markets

Snap also spooked markets with its guidance. It said that its revenue growth would further decelerate in the fourth quarter. It added, “Forward looking revenue visibility remains incredibly challenging, and this is compounded by the fact that revenue in Q4 is typically disproportionately generated in the back half of the quarter, which further reduces our visibility.” The company did not however provide quantitative guidance for the second consecutive quarter.

Gene Munster lists the four headwinds that Snap faces

Gene Munster of Loup Ventures said that the company is facing four key headwinds. He said that firstly, the broader ad market is witnessing softness. He said that Apple’s privacy changes have hurt social media companies. Notably, even Meta Platforms expects to lose $10 billion in revenues this year due to Apple iPhone privacy changes.

Munster also listed TikTok’s growing popularity as a headwind for social media companies like Snap. Even Facebook is losing popularity among teens who are instead turning to TikTok. Even YouTube’s revenues have been hit by TikTok’s popularity and it is now focusing on “Shorts” to better compete with TikTok. Instagram was also looking to launch a new version for teens last year but it was throttled by US lawmakers.

Munster said that Snap needs to figure out how it monetizes its users. He believes that the company needs to solve its monetization problem to arrest the falling revenue growth.

TikTok’s popularity is a challenge for social media companies

Scott Kessler, an analyst at research firm Third Bridge Group also believes that TikTok’s popularity is a risk for Snap. He said, “A major reason for Snap’s difficulties is direct competition from TikTok, in terms of users and usage and advertisers and advertising. And while Snap seems to be back on its heels, TikTok has been investing and growing aggressively.”

TikTok is owned by ByteDance which is the most valued startup company despite billions of dollars in losses last year. Some countries see TikTok as a security threat and India has banned the app. Even former US president Donald Trump threatened to ban TikTok.

Social media stocks crash after Snap’s earnings

Social media stocks fell across the board after Snap’s earnings. The company has wiped off billions of dollars in market caps of social media companies with its previous two earnings releases as well. Meta Platforms is anyways the worst performing FAANG stock of the year and looks set to slide even further post Snap’s earnings release.

The global ad market has been weak

Markets would next look forward to earnings of Alphabet and Meta Platforms next week. Their earnings would provide insights into the health of the global digital advertising market. Tech earnings have been mixed so far. While Netflix soared after its Q3 2022 earnings, Tesla stock plunged after missing revenue estimates. The company also lowered its 2022 delivery forecast and said that the growth would be below 50%.