The market threw a bit of a hissy fit on Tuesday after social media company Snap (SNAP 2.24%) published an 8-K saying it would miss its second-quarter revenue guidance due to macroeconomic concerns.
Investors took this as a cue that the digital advertising market is headed for a slowdown and decided to sell off mega-cap names like Meta Platforms, Alphabet, and Amazon. The S&P 500 was down 0.81% on the day and the Nasdaq 100, which has a lot of exposure to the digital advertising industry, was down 2.20%.
Here's what Snap said in the letter and what it could mean for the digital advertising industry and the stock market in general.
Image source: Getty Images.
Snap's guidance reduction
In a letter to employees on Monday, CEO Evan Spiegel said the company will likely miss the second-quarter revenue guidance it gave out a month ago. He blamed deteriorating macroeconomic conditions due to inflation, supply chain issues, and the war in Ukraine.
Snap, similar to other social media and consumer internet businesses, runs a digital advertising business on its app. It is not directly impacted by supply chain issues, but if merchants and other companies are not able to get goods to customers or consumer demand is waning (or both), fewer people will be looking to advertise products and services. This second-order effect is currently hurting Snap's growth.
The letter stated that Snap will most likely grow its revenue year over year, but will come in short of the 20% to 25% guidance range it gave out just a month ago. This rapid change in expectations made investors bearish on Snap stock, sending shares down 43% (not a typo) on Tuesday.
What it could mean for its peers and the market in general
The digital advertising industry is one of the largest and fastest-growing in the world. Investor favorites like Meta Platforms, The Trade Desk, and Roku have business models that serve a part of this market. All three of these stocks fell more than 5% on Tuesday, with both The Trade Desk and Roku falling more than 10%, because of a reaction to the Snap news.
Statista estimates that $566 billion will be spent on digital advertising in 2022, and it's projected to grow to over $700 billion by 2025. If these numbers come down because of a deteriorating economy, that will be a big hit to the earnings growth potential for the U.S. stock market. This could be a catalyst that drives down stock prices.
Snap is only a small part of the digital advertising market, with $4.4 billion in trailing-12-month revenue. But it is possible that spending is correlated, meaning that revenue guidance that was given at the end of the first quarter might have been a bit optimistic for companies like The Trade Desk, Roku, Meta Platforms, and others. We'll find out for sure over the next few quarters.
Don't sweat this too much
Even if Snap's revised guidance is a warning sign to the digital advertising market, I wouldn't be too concerned if you are an investor in any of these businesses. Sure, their financials could be hurt for a few quarters or even longer, which might drive the stocks down in the short run. But if you are a believer in these businesses and plan to hold their stocks for a decade-plus, a year or two of slowing growth is not a thesis buster.
It's also possible that Snap represents an isolated incident. These companies are not carbon copies of each other, so just because one is seeing weakening demand does not guarantee it is happening to the same degree at another. We might look back a few quarters from now and think all this selling was just an overreaction to one company's bad quarter, making this volatility noise that long-term investors should have just ignored.
