When it rains, it pours
In its fourth quarter 2021 earnings report, Snap CEO Evan Spiegel said: "Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July. While we anticipated some degree of business disruption, the new Apple provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS."
The playing field may be leveling for social and traditional media.
The second major event is the rise of TikTok. Forecasts project that TikTok's ad revenue will grow a head-turning 200% this year to $11.6 billion. On the other hand, Snap is projected to increase revenue to $5.2 billion -- less than half of TikTok's revenue.
Since its launch in 2016, TikTok has amassed 1.2 billion monthly active users by the fourth quarter of 2021. That number is expected to grow by 50% to 1.8 billion by the end of 2022. In comparison, Snapchat was launched in 2011 and has increased its monthly average user base to only 500 million. TikTok represents a growing powerhouse as social media platforms compete for user attention and ad spending.
Lastly, calls for a global recession have been mounting in recent months. Social media platforms have grown their user bases and ad revenue much faster than traditional media over the last several years. So it can be easy to forget that ad spending is very cyclical. If consumer spending declines or a global economic slowdown happens, advertisers will find ad spending a waste of money, regardless of the medium.
Though Snap's revenue has grown in recent quarters, its growth rate has shrunk. In its first-quarter earnings report, as escalated inflation numbers began to make headlines, the company projected revenue growth of 20% to 25% for the second quarter of 2022. The projection implied Snap's slowest revenue growth since the COVID-stricken first quarter of 2020. Then in late May, as burdensome inflation numbers persisted, the company issued an SEC filing saying it would report revenue below the low end of its guidance.
Fight or flight?
One could argue that because Snap shares have been demolished, all the bad news is already calculated into the current share price. The counterargument would be that Snap gets 68% of its revenue from ad sales in the U.S., where the iPhone holds a dominant market share that exceeds 50%. About 14% of iPhone users have devices too old to have pop-up privacy setting alerts. As those folks upgrade to newer versions that allow them to block info-sharing, more will likely opt out of being tracked.
Investors should be asking what the right price is for Snap shares. Finding value in the company may prove daunting because it has never generated an annual net income. With recession calls extending through 2023, Snap's earnings may remain elusive.