What happened
Snap (SNAP 27.63%) released disappointing financial results after the market close on Thursday, reporting that advertisers are reining in spending as a result of the rapidly deteriorating economic landscape. That sent its stock down 28.1% on Friday, and several other companies that earn the bulk of their revenue from digital advertising plunged in unison.
Pinterest (PINS 4.04%) was among those hardest hit today, with shares down roughly 6.4%. Shares of Roku (ROKU -10.29%) and Meta Platforms (META 0.43%) also took a hit, falling 3.3% and 1.2%, respectively, on the day.
This sell-off hit these companies on fears that marketers are beginning to scale back spending in anticipation of a protracted downturn. Advertising is historically among the first expense items on the income statement to get the axe in the face of economic uncertainty. It's important to remember, however, that not all those that rely on digital advertising are created equal.
Image source: Getty Images.
So what
After the market close on Thursday, Snap released its third-quarter financial report and the results weren't pretty. Revenue of $1.1 billion was up just 6% year over year, its slowest-ever quarterly increase. This continued the company's pattern of decelerating growth, which slowed from 38% in the first quarter and 13% in the second quarter.
Further stoking investor fears, Snap decided not to provide expectations for revenue or adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the fourth quarter of 2022, citing the "uncertainties related to the operating environment." The company did say, however, that it's highly likely the deceleration will continue, with revenue essentially flat year over year in the fourth quarter.
Other commentary provided in Snap's shareholder letter didn't provide any solace: "We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital." Snap also continues to struggle to overcome privacy measures enacted by Apple last year, which made it more difficult to reach iPhone users with targeted advertising.
The somewhat dour observations sent many analysts scurrying to sharpen their pencils and hastily revise their forecasts. While some tempered their pessimism, others were downright bearish. Bernstein analyst Mark Shmulik downgraded the stock to hold, saying Snap "seems to have lost all momentum." MKM Partners analyst Rohit Kulkarni downgraded the stock to neutral (hold) saying the company "will have difficulty remaining under control of its own destiny over the next six to nine months." Furthermore, Kulkarni doesn't expect the situation to improve until Snap is able to demonstrate consistent execution, which has been lacking.
The declines weren't all about Snap's results. Several analyst takes dropped today that specifically addressed challenges faced by Meta Platforms.
J.P. Morgan analyst Doug Anmuth lowered his price target on Meta Platforms to $180 -- which still represents 37% upside from the stock's closing price on Thursday -- while maintaining his hold rating. The analyst remains cautious about companies in the internet sector, particularly those with significant currency exposure in the face of the strong dollar. Deutsche Bank analyst Benjamin Black lowered his price target on Meta Platforms to $170, while maintaining his buy rating. He noted the company has generally lagged the broader market, citing macroeconomic concerns and a pullback in advertising spending.
Now what
Investors should be careful not to paint all companies that rely on digital advertising with the same brush.
For example, Snap and Meta Platforms have both reported difficulties circumnavigating Apple's privacy measures. Late last year, Facebook said the moves would cost the company $10 billion in revenue in 2022. Snap has previously said Apple's changes made things "more challenging than expected."
At the same time, the data Pinterest collects on its users' interests have largely isolated it from privacy measures, while Roku said its advertising was positively impacted by Apple's moves.
To be clear, the slowdown in advertising now is mostly tied to the deteriorating macroeconomic conditions, but the distinction remains. Advertisers will be looking for the most bang for their buck and will allocate their spending accordingly.
Meta Platforms, Roku, and Pinterest have yet to report their own quarterly results, which should have a much greater impact on their stock prices than how Snap fared over the past three months.
Furthermore, each company has long-term advantages. Roughly 3.65 billion users visit Meta's social media platforms each month, giving the company an unrivaled network effect. Cord-cutting continues at a frantic pace, with viewers turning to streaming video for their in-home entertainment needs, which will ultimately benefit Roku. Pinterest is the anti-social-media company, and users will need a place to plan and dream in the midst of the downturn, even as they cut back spending.
For those reasons and more, investors shouldn't extrapolate Snap's results onto these stocks.
