Snap (SNAP -3.26%) investors are bracing for some bad news in a few days. The social media specialist will announce its fiscal 2022 second-quarter results on Thursday, and expectations are low heading into that report.
The stock has slumped so far in 2022, mainly because management warned in late May that the advertising market is slowing down.
Look for a critical update on that outlook on July 21, along with some key new stats around user engagement and profitability. Let's take a closer look.
Advertising sales may be slowing
Snap's Q1 update contained plenty of good news about the business. An 18% increase in active users helped push advertising revenue even compared to soaring results a year ago. But the social media stock's business is slowing. Last quarter's 38% revenue spike was a slowdown from the prior quarter's 42% increase and from the 57% boost that investors saw in Q3 of 2021.
Snap released dozens of new features and improved content offerings in the past few months in a bid to extend its growth momentum. However, pressures are building in its industry. Meta Platforms (META 0.16%) CEO Mark Zuckerberg has been warning about a growth pullback that could turn severe over the coming months.
Snap management suggested that such a slowdown might already be starting when it said back in late May that "the macroeconomic environment has deteriorated further and faster than anticipated." The big question heading into Thursday's announcement is the scale and scope of the recent slump, especially on the advertising business.
Rising costs may limit capital spending plans
Back in April, Snap was highlighting many productive areas that management saw for investing its positive cash flow. These included augmented reality (AR) innovations, new lenses, and additional chatting functionality. The company has even been pushing into original content with its own original shows.
But the investing climate could be changing as growth slows. Snap might respond to this shift by reducing its capital spending plans, just as Meta Platforms appears to be doing. Investors are becoming more focused on profitability, after all.
SNAP Net Income (Quarterly) data by YCharts
And Snap's adjusted profit margin sank to just 6% of sales last quarter after steadily climbing to 25% of sales from a prior low of roughly breakeven. The stock might not begin its recovery until management can show progress at moving back toward that 25% adjusted profit mark.
Looking ahead
The big question heading into Thursday's report is whether Snap will issue another weak outlook. Most investors who follow the stock are looking for sales gains to land at just 20% in Q3, suggesting another period of slowing growth ahead. CEO Evan Spiegel and his team might issue a more cautious forecast, though, depending on factors like user engagement, advertising spending, and demand for new AR functionality.
Even a sluggish outlook wouldn't be fatal to the investing thesis for this social media stock. Snap's sales are still far higher than they were before the pandemic, and the company is well positioned in the AR and virtual reality spaces, which could see explosive growth over the next decade.
But Thursday's report is likely to test investors' willingness to wait on those developments. Snap will first have to navigate through an unusually tough sales and profit environment that could affect both fiscal 2022 and fiscal 2023.
