Snap Inc SNAP shares are plummeting 40% after CEO Evan Spiegel warned employees the company will miss its targets for revenue and earnings in the second quarter.
In a note to employees on Monday afternoon, Spiegel said Snap will also be slowing its hiring as it looks to cut costs in the difficult environment.
“Today we filed an 8-K, sharing that the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month,” Spiegel wrote.
In April, Snap guided for second-quarter revenue growth of between 20% and 25% and EBITDA of between $0 and $50 million. Spiegel said Monday that revenue growth in the second quarter will be positive, but growth will fall short of its previous guidance.
Snap's commentary on the weak climate for online advertising dragged down shares of other social media and advertising stocks as well. Meta Platforms Inc FB shares dropped 9%, Trade Desk Inc TTD shares were down 18.4% and Pinterest Inc PINS sares were down 22%.
Deteriorating Environment: Morgan Stanley analyst Brian Nowak said the guidance cut was surprisingly bearish.
"While we believe verticals such as CPG, streaming, financial services,and travel are all drivers of SNAP's business, we believe the weakness they are seeing is broad based across verticals and geographies," Nowak said.
Rosenblatt Securities analyst Barton Crockett said the huge sell-off in Snap shares has appropriately discounted its deteriorating near-term outlook, and growth will likely re-accelerate in the longer-term.
"Snap has meaningful positives -- rising user engagement, deep penetration of a coveted youth demo, and leadership in augmented reality/lens technology," Crockett wrote.
Warning Sign For Other Advertisers: Bank of America analyst Justin Post said concerns over a recession in online advertising are becoming a reality.
"We think reopening, macro factors, unusual comps and a negative news cycle is impacting ad spend, and not a sudden shift in user activity on the platform or new competitive initiative in May, so we remain constructive on LT revenue potential," Post wrote.
RBC Capital Markets analyst Brad Erickson said the sell-off in other ad stocks isn't surprising.
"The read will of course be negative for the space but a warranted debate is how much of this is SNAP-specific vs. broader industry given management's signal loss commentary," Erickson wrote.
Wells Fargo analyst Steven Cahall said Snap's guidance cut should be an alarm bell for the entire advertising industry.
"Assuming 10% downside to our ad revenue estimates for 2022-24 and decremental Adj. EBITDA margins that are equivalent to total company EBITDA margins, we get 9-10% earnings downside risk at the most ad-heavy names like OMC, CCO, IHRT, IPG and AUD, and then -MSD% for TV network operators," Cahall wrote.
Buying Opportunity: JMP analyst Andrew Boone said the Snap sell-off has generated a compelling risk-reward scenario for investors.
"While we acknowledge that the advertising environment is worsening and we have no clear view that this is the bottom, we view the selloff in shares as an opportunity for long-term investors as Snap is a must-buy platform for advertisers as it reaches 75%+ of 18-34 year-olds in 20+ countries, can continue to take share of video budgets (especially those from linear TV), and is well positioned to be an AR platform as the Snap Kit extends Lenses to 3P developers including OEMs, retailers, and other entertainment apps today," Boone wrote.
Raymond James analyst Aaron Kessler said risk is to the downside at the moment for other advertising companies.
"We would note that Snap guidance was the most aggressive in terms of y/y and q/q growth rates and hence we may not see as significant estimates revisions for other names," Kessler wrote.
Ratings And Price Targets:
- Bank of America has a Buy rating and $30 target.
- Morgan Stanley has an Overweight rating and $55 target.
- JMP has a Market Outperform rating and $45 target.
- RBC Capital Markets has a Sector Perform rating and $17 target.
- Raymond James has a Sector Perform rating.
- Rosenblatt Securities has a Buy rating and $23 target.
Snap's stock trades around $13.18 at press time.
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