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What Snap’s devastating month says about the economy

With its stock having fallen for the past three consecutive months, Snap ended May with a 50% drop, making it the company’s worst month on record.

The stock saw its biggest drop on May 24 after Snapchat’s Santa Monica-based parent company announced it was cutting its second-quarter earnings and revenue guidance. The stock fell 43% that day.
The stock, which hit a recent high of over $39 in early April, hovered in the mid-teens last week.

In previous quarters, Snapchat consistently hit revenue and profit targets, making the current quarter a shock to the company’s investors.
At JP Morgan’s 50th annual global technology, media and communications conference, held May 23 in Boston, Snap chief executive Evan Spiegel said that while the company’s revenue continued to grow year-over-year in the second quarter, both revenue and EBITDA — or earnings before interest, taxes, depreciation, and amortization — would fall below projected ranges. He also said the company could slow down hiring and look for other ways to cut costs.

“The macroeconomic environment has definitely deteriorated further and faster than expected when we released our second quarter guidance,” Spiegel said. “Certainly, something we are working on with many other companies who are of course affected by supply chain issues, inflation, interest rate concerns, etc.”
Lee Ohanian, a UCLA economics professor, said Snapchat’s parent company needs to do “internal research” over the next few months to figure out where its business model needs to be revamped. He said advertising is a “highly cyclical” business and that advertising is declining a lot relative to when the overall economy is weakening.

“What we’re seeing now is a weakened macro economy, which means advertisers are going to start pulling out, and advertisers are Snapchat’s main source of revenue,” Ohanian said. “So a weakening economy as a whole is bad news for the economy, but it’s especially bad for Snapchat.”

Ohanian said Snap will endure a tough six to nine months, which will be especially tough due to the continued weakening economy. While Snap needs to “ride the storm,” Ohanian said he expects the company’s executives to weed out whatever they’re lacking and implement new ideas. His most important point: Snap needs to start generating bigger profits.

“This is a $4 billion business with costs around $4 billion. They don’t make a profit,” Ohanian said.
Snap is the third-largest public company in the Los Angeles area, according to The Business Journal’s “The Lists 2022” ranking. Only The Walt Disney Co. and Amgen Inc. were larger, measured by market capitalization.

TikTok concern

Analysts and investors are also wary of the ever-increasing competition Snap faces from other social media companies, especially TikTok.
According to Insider Intelligence, TikTok is expected to triple its ad revenue this year to around $5.96 billion. Snap, on the other hand, is expected to bring in $4.46 billion, a modest increase from 2021’s figure of $4.1 billion.

However, as Ohanian pointed out, Snap’s real dilemma is the disruption of the digital advertising market caused by inflation and rising interest rates.
Some analysts have speculated that younger Snap users may be more sensitive to inflation. And most of Snap’s advertisers are packaged goods and fashion brands, the types of businesses hardest hit by supply chain issues. It is reasonable for investors to assume that these companies will reduce their advertising.

Jefferies analyst Brent Thill recently told CNBC that his investors are avoiding the technology. “It’s a buyers’ strike. It’s cold out there… No one wants to touch tech,” he said on “Closing Bell.”
“Everyone is worried about the fundamentals,” Thill continued. “And most CFOs are talking more cautiously about the macro economy…everything is starting to slow down.”

Snap is not alone. When the company’s shares fell on May 24, other advertising-focused social media companies also felt the repercussions. Twitter fell 3.8% and Meta 6.3%. This downward trend shows how the weakening economy and global political uncertainty are particularly depressing for the stock market.

All of these advertising-focused platforms have been particularly affected by Apple’s much-discussed privacy policy changes, which make it harder for advertisers to track potential buyers by allowing iPhone users to opt out of sharing. their data. Inflation has also made buying less likely and rising interest rates are sounding the alarm of a possible recession.

Goldman Sachs analysts led by Eric Sheridan said in a note that Snap’s earnings and commentary have been more “volatile” compared to bigger tech companies like Facebook’s Meta and Google’s Alphabet Inc..
Snap’s second quarter results will be released on July 28.