What happened
Snap (SNAP 2.22%) issued a warning after the market close on Monday, suggesting that the economic picture was rapidly declining, sending its stock down as much as 41.7%. As a result, many digital advertisers and social media stocks plunged in unison.
Pinterest (PINS 2.22%) was hit the hardest, with shares down roughly 22% at 1:30 p.m. ET. Shares of The Trade Desk (TTD 2.02%) and Roku (ROKU 2.55%) had fallen 19.8% and 18%, respectively. Meta Platforms (META 2.44%) was down 9.6%, while PubMatic (PUBM 4.41%), Magnite (MGNI 3.03%), and Criteo (CRTO 0.50%) slumped 15.4%, 14.2%, and 5.4%, respectively.
This sell-off seemed to indiscriminately take down nearly every company that relies on digital advertising for its livelihood, on fears a recession might be at hand. Advertising is among the first cost items on the income statement that companies look to slash in the face of an economic downturn, but not all digital advertisers are created equal.
So what
In a regulatory filing late last night, Snap, the parent of social media site Snapchat, said, "The macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range."
This sent many analysts scurrying to sharpen their pencils, quickly revising their projections for the coming quarters, and in many cases what they had to say was discouraging.
Morgan Stanley analyst Brian Nowak seemed to capture the somber mood, saying the "surprisingly bearish guide down" was "notable," particularly regarding the speed at which Snap's business deteriorated, adding he believes the weakness the company is reporting is likely broad-based across geographies and verticals. Furthermore, Nowak believes all digital advertisers will feel the pain to some degree or other, particularly platforms with less scale, including Pinterest.
Jefferies analyst Brent Thill cited trouble ahead for Meta Platforms, saying the deteriorating economy "will likely impact the whole ad industry." Analyst Doug Anmuth of J.P. Morgan took a similar stance, noting that Snap's "cautious tone creates further downside risk to other online ad estimates."
However, Justin Patterson of KeyBanc had a different take, suggesting that while Snap's update put the entire industry on the defensive, larger digital advertisers including Meta Platforms, The Trade Desk, and Roku would hold up much better than those without scale -- which could include such platforms as Magnite, Criteo, and PubMatic.
Now what
With apologies to Thomas Paine, "These are the times that try investors' souls."
Wall Street has been plagued by economic uncertainty for months, with the specter of a recession waiting in the wings. It shouldn't be too much of a surprise, therefore, that the likelihood of a full-fledged economic downturn just ratcheted up a notch.
That said, The Trade Desk, Meta Platforms, and Roku are leaders in their respective industries and while they might take a hit over the short term, the future looks bright and the trio are much better positioned to weather any storm than their smaller digital advertising counterparts.
That puts these three companies at the top of my buy list today.