Social media company Snap (SNAP -4.04%) reported weaker-than-expected fourth-quarter revenue after market close on Tuesday. Even worse, management said its top line is declining so far during the current quarter. The Snapchat parent cited a number of reasons for its revenue headwinds. An uncertain macroeconomic environment may be one of those reasons, but it's far from the only one.
Here's what's weighing on Snap's business -- and what management is saying about potentially turning it around.
Slowing growth
The company, which makes most of its money from ads on its photo- and video-sharing app, said in its fourth-quarter update that revenue barely increased (less than 1% growth) from the year-ago period. This brought full-year revenue to $4.6 billion, up 12% year over year.
Notably, Snap's top-line growth has been slowing for several quarters. After posting top-line revenue growth of 38% in the first quarter of 2022, second-quarter sales grew 13% and third-quarter sales rose 6%. With growth nearly coming to a halt in Q4, investors have good reason to be worried.
Making matters worse, the company said the first quarter of 2023 is faring poorly as far as top-line trends are concerned. The social media company has "observed a year-over-year decline in revenue of approximately 7% quarter-to-date," management said in the company's fourth-quarter letter to shareholders.
Why Snap's top line is struggling
Unsurprisingly, management said "macroeconomic headwinds" have been one of the company's challenges. But Snap is taking heat from several other areas as well. Specifically, management called out increased competition and platform policy changes as other challenges.
Regarding increased competition, it's no secret that TikTok is stealing some user attention away from similar photo and video-sharing apps like Snap. Even more, TikTok's popularity as a platform for users to aimlessly browse and consume content may be taking some ad budget away from Snap. TikTok's revenue in 2022 is expected to come in at about $10 billion, up from about $4 billion in the prior year. This defies gravity as many digital advertisers saw their sales slow significantly last year. Then, of course, there's Facebook and Instagram parent Meta Platforms, which has been investing aggressively in its TikTok-like format called Reels. The company has been making Reels more prominent in its apps and has been ramping up its efforts to monetize the fast-growing format.
There are also Snap's platform policy issues on Apple's iOS. Ever since the iPhone maker started rolling out privacy policy changes in mid-2021 that made ad tracking and measurement more difficult on its mobile operating system, Snap has been working hard to make its advertising technology less reliant on Apple's platform. But Snap is still in the process of rebuilding its advertising infrastructure to address this challenge.
In short, Snap's weak results and its poor start to the first quarter highlight some of the risks to social media stocks. Snap's business will always compete against the hottest new trends in social media, as well as other apps that may attract user attention. In addition, Snapchat is evidently largely reliant on platforms like Apple's iOS and Google's Android.
But to Snap's credit, the company's daily active users did increase from 363 million in Q3 to 375 million in Q4. So the company seems to be doing something right when it comes to engaging its user base. Perhaps this will pay off in a revenue growth reacceleration later in the year. But considering how the company is showing that it is highly susceptible to technological disruption and to the rapidly changing competitive environment, investors may want to wait for better signs of top-line improvement before they consider buying this dip.
