Shares of Snap Inc (NYSE:SNAP) plunged 43% on Tuesday, sending the stock to its lowest-ever point and driving down shares of rival social media and digital advertising companies.
The decline comes after the social media company warned its shareholders that it would fail to meet revenue and adjusted earnings per share (EPS) targets in the current quarter.
Snap wrote in an SEC filing:
“Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated.”
‘Advertising is Cyclical’
Snap stock price has plummeted roughly 84% since surging to its 52-week high in September 2021 and remains down almost 70% year-to-date. Moreover, Snap’s sharp decline also dragged down rival stocks, particularly those whose revenue depends largely on advertising.
Shares of Facebook owner Meta (NASDAQ:FB), Roku (NASDAQ:ROKU), and Pinterest (NYSE:PINS) dropped 7.62%, 13.74%, and 23.64%, respectively. Snap’s disappointing Q2 guidance also affected the wider ad tech industry, with the Trade Desk (NASDAQ:TTD), Magnite, and PubMatic declining 18.51%, 13.15%, and 15.85%, respectively.
Morgan Stanley analysts told investors that:
“We expect all online ad platforms to feel some impact of a significant consumer pullback. Advertising is cyclical.”
Investors remain concerned about persisting headwinds such as record-high inflation, interest rate, supply chain constraints, and Russia’s invasion of Ukraine, which have forced digital advertising companies to reassess their spending strategies in the second quarter. As a result, tech companies and brands that rely on ads have been forced to slow down their hiring efforts and slash costs to offset the losses.
Evercore ISI analysts said there is “no real reason to not take Snap’s negative pre-release at face value” and warned of “much harder” macro headwinds going forward.
It is important to note that nearly all online advertising brands have missed their revenue expectations in the first quarter and have voiced concerns about the impact of macro conditions on their future performance.
What’s the Outlook for Companies with Digital Advertising Revenue?
Market valuations of social media companies and online advertisers have seen a major correction this year. This comes after unparalleled growth in 2021 as advertisers recovered from the devastating coronavirus pandemic.
Apart from economic challenges, including inflation weighing on their revenues, Snap and other social media companies have also overestimated their ability to maintain such an unprecedented growth rate. However, not all analysts and industry experts share the same view. Mass media company iHeartMedia (NASDAQ:IHRT), which owns a number of media and advertising businesses, claims it has not yet seen any impact on its long-term advertising operations despite the difficult environment.
Moreover, the company said it has been seeing opposite trends from Snap and other social media companies battered by the market drawdown. Bob Pittman, CEO of iHeartMedia, noted an impact on its advertising business in April, though the company expects a more positive trajectory in May and June.
Some believe that iHeartMedia hasn’t experienced significant adverse effects thanks to its highly diversified exposure to roughly 160 markets across the U.S. The company has businesses across advertising, broadcast radio, premiere national networks, and podcasts.
Pittman said that its radio businesses, in particular, have been driven by lower cost per mille (CPM), which has helped attract more advertisers.
The San Antonio, Texas-based company has also noted an elevated demand for its digital audio advertising solutions, with its podcast segment growing 79% in the first fiscal quarter. The company’s podcast business accounts for as much as 10% of its total revenue and has a larger margin than the overall company.
Pittman said that U.S. consumers are being attracted to podcasting at an unprecedented rate, driven by their high interest in appealing stories and good companionship.
“In video, we’ve run out of time for our eyeballs. So if you want to watch something, it comes at the expense of watching something else. In audio, we’re filling up time that used to be attributed to peace and quiet.”
Focus on Performance Advertising
Some analysts believe that Snap’s earlier warning about the challenging macroeconomic environment underscores a drop in demand for advertising. This is because lower advertising spending has historically served as a reliable indicator of a weakened economy because advertisers have previously reduced their ad spending as a share of GDP and directed their budgets toward alternative mediums such as digital.
Along these lines, companies that are more focused on performance advertising and are capable of delivering a strong return on investment (ROI) will be better positioned to weather the current headwinds.
Because of that, analysts predict that digital advertising will stay more resilient in this environment compared to traditional advertising, with digital platforms like Google (NASDAQ:GOOGL) Search and Amazon (NASDAQ:AMZN) sitting in the best position thanks to their first-party data on search intent.
Further, online consumer activity continues to increase. E-commerce accounted for 14.2% of total retail sales in Q4 of 2021. Online payments have become more affordable as well, with merchants charging as low as 1% fees on transactions. In terms of social media, the average internet user spends 147 minutes per day browsing social media as of March 2022. Undoubtedly, the ever-increasing online behavior of consumers will continue to play a role in the evolution of digital advertising.
Conclusion
Snap’s revenue and EPS warning has sent shockwaves throughout the digital advertising industry. Shares of major companies exposed to this sector plunged in response to Snap’s disclosure, although not all analysts agree on the path forward for the sector as a whole.