What happened
Snapchat parent Snap (SNAP 11.02%) fell 28.8% in October, according to data from S&P Global Market Intelligence.
The social media giant fell after posting third-quarter revenue growth of 57%. While that would look good to most companies, that figure was actually below analyst expectations and even below the low end of management's own guidance.
All social media companies make money from advertising, and a new change in the latest iOS operating system from Apple limited advertisers' targeting capabilities as well as the ability to assess the effectiveness of their campaigns.
That hurt revenue more than expected. Since the change is new this summer and the future a bit uncertain, investors sold Snap's high-flying stock hard on the news.
Image source: Getty Images.
So what
On the conference call with analysts, CEO Evan Spiegel was straightforward about Snap's near-term difficulties.
"I'll share your disappointment," he said. "This has definitely been a frustrating setback for us, but I think over the long term these privacy changes and protecting privacy for users of iOS ... is really important for the long-term health of the ecosystem and something that we fully support."
Spiegel then went on to detail that the new privacy-enhanced ad platform from Apple called "SKAdNetwork" was more limited than thought, sometimes didn't get expected results, and generally threw advertisers for a loop, at least temporarily.
Snap is adjusting by sharing SKAdNetwork best practices with advertisers, developing its in-house tools to help integrate with the new framework, and developing new ad formats that would be easier to track within Snapchat. Of course, those investments are increasing costs while revenue is decelerating. Hence, the sell-off.
Now what
Snap and founder Evan Spiegel have been counted out before, especially immediately after the company's 2017 initial public offering, only to rebound strongly in 2020 and 2021. So that may be worth considering after October's sell-off.
After all, Snap did see 23% daily active user (DAU) growth, marking the fourth consecutive quarter of DAU growth over 20%. So Snap is still gaining users, even if advertisers had a hiccup learning these new tools. The company's platform is still under-penetrated outside the U.S. and Europe. So, some may consider buying the dip.
On the other hand, the stock is still far above where it was even before the pandemic and is also quite expensive at around 22 times sales. Snap is also still generating huge operating losses to the tune of $774 million over the last 12 months, though those losses are moderating.
With lots of innovation in augmented reality and virtual reality, Snap's upside remains significant, but the recent introduction of new ad rules as well as its high valuation remain headwinds. Investors should have a well-researched view on Snapchat to navigate these crosscurrents.
