The market is a funny place. Snapchat had its best-ever day only three months ago, rocketing up 58% following the reporting of a surprise profit for Q4 of 2021.
Last week, the share price then had its worst-ever day, cratering 45%. It was trading at $12.79 per share, 85% off the all-time-highs set last September when it soared past $83 per share.
Welcome to the club, Snapchat
Some phrases you don’t want to hear as an investor:
- “unscheduled earnings warning”
- “(we will) review spending to find additional cost savings”
- “(we will) evaluate the remainder of our 2022 budgets”
Snapchat investors got the wombo-combo of all these ominous sayings last week, with the share price promptly shedding a third of its value when the earnings report went live.
The company said in a filing Monday that since it issued guidance at its earnings on April 22 – only one month ago – that “the macroeconomic environment has deteriorated further and faster than anticipated”. They’re not lying – a simple glance at my plummeting portfolio is all the verification I need.
The fact that this was followed by a warning that earnings and revenue would be “below the low end” of its guidance range this quarter then sent investors running for the SELL button. But is the admittedly dire macroeconomic climate a valid excuse for Snapchat’s issues?
CEO Evan Spiegel thinks so, asserting in a note that the fundamentals of Snapchat’s business remained “strong”, and that the “rising inflation and interest rates, supply chain shortages and labour disruptions, platform policy changes, the impact of the war in Ukraine and more” are to blame for the sluggish digital advertising numbers.
But akin to how my bank still justifies keeping me on hold for forty minutes by blaming it on the disruptions to employees working from home during COVID (honestly…still!), I’m not sure Snapchat’s excuse is totally valid here. Sure, everything is down, but there is more wrong with Snapchat that should worry investors.
Competitors
The guidance stated that “Our community continues to grow, and we continue to see strong engagement across Snapchat and continue to see significant opportunities to grow our average revenue per user over the long term”. But where exactly is this growth in revenue per user going to come from?
I have long questioned why Snapchat has the ability to retain the users it does, when it offers almost nothing that other social media apps can’t do better themselves. I have been wrong in this assertion – as the above chart shows, with the share price on a constant upswing until this year.
But it appears the rest of the market now agrees with me. Again, not because I’m right, but because of the new presence of another competitor which is eating into the exact demographic that Snapchat targets – TikTok.
Analyst Thoughts
UBS analyst Lloyd Walmsley sums this up well, “the key question, in our minds, is to understand how much of this is merely macro weakness (which the company can ultimately bounce back from) versus the competitive impact from TikTok (further risk to multiple).”
I tend to believe it’s the latter. TikTok is a juggernaut and there is only so much free time a person can lend to social media. TikTok’s ability to rein in a user and hold their attention is ideally built via its addictive algorithms of short-play video, playing on the minimal attention spans of young teenagers and other young Gen Z’ers. Snapchat, it seems, has become old.
Walmsley floated the optimistic argument for Snapchat by stating it “emphasised it ‘likely’ would miss the low end but it doesn’t sound like it would miss by a wide margin. Simple math suggests that growth could exit the quarter below 10% (year-over-year) to get to below the low end of previous guidance, given a +30% start to the quarter”
He concludes by stating UBS still see “an attractive risk/reward skew in SNAP shares from here, though we acknowledge it may be some time before the bull case plays out.”
Other Side of the Coin
But is this really the bull case? An almighty plunge like the one seen last week should not occur off the back of a small miss like this, following a blowout Q1. There are other bear factors here, and the market is starting to realise them.
TikTok is not a macro headwind that is going to disappear soon. Neither is Apple’s updated privacy policy for iPhone users, which was another body blow to Snapchat. Even the actual macro headwinds themselves won’t disappear anytime soon. This is not a speedbump for Snapchat, this is a hammer blow to a stock that was overvalued relative to its power in the social media corner.
Its current valuation of $25 billion (it has rebounded slightly since earnings, up from $21 billion) is a lot more appropriate than the $135 valuation it traded at its peak last year, as tech stocks rode the pandemic wave to all-time highs across the board. Call me a boomer, but I’m still not going near SNAP.
