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Following a pretty dismal earnings report last week, Snap Inc.’s ongoing financial struggles continue to spook investors, and over a dozen investment banks and brokerage firms have issued downgrades on its stock.
Bloomberg reported Monday that over a dozen brokerages and investment banks issued a downgrade recommendation on Snap stock. A downgrade, while technically just an advisory, is a key indicator to the rest of the market how well – or, in Snap’s current case, how poorly – analysts expect the stock to perform in coming months, and could trigger further sell-offs if the recommendation is to dump shares instead of hold.
The company’s struggle to turn its camera app into a profitable, value-generating machine is clear in its financial statements. As Seeking Alpha noted yesterday, Snap’s second quarter earnings showed operating costs increased nearly 30% year-over-year, while the company continues to operate at a loss.
Snap declined to comment.
Snapchat saw its daily active user count increase 18% annually to 347 million, but a growing audience doesn’t mean much if the social media giant can’t monetize it.
Snap’s net loss in the second quarter of this year totaled $422 million, on revenues of $1.1 billion. The net loss was a steep increase from the same time last year, when it posted losses of $152 million.
After its earnings report Thursday, Snap stock sank over 26%. In the past 12 months, its value has dropped roughly 87%.
Equity researchers firm MoffettNathanson also branded Snap stock with a downgrade. In a letter Friday, the group said it “rarely ever” decides to issue a stock downgrade right after an awful quarterly report in a string of lackluster earnings statements, and claimed the last time it posted such a warning was “decades ago.”
“We have lost confidence in the company’s leadership team and their ability to forecast their business,” MoffettNathanson wrote. “Given the losing hand that Snap is now facing combined with the apparent lack of valuation support and the need to preserve free cash flow, absent a take-out, there really does not appear to us a compelling reason to buy this stock.”
(Disclosure: Snap is an investor in dot.LA)
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Social media giant Snap’s tough year continues.
The Santa Monica-based company reported disappointing financial results on Thursday as the second quarter “proved more challenging” than it expected. The photo-sharing app now plans to “substantially” slow its hiring as it grapples with declining demand for its core advertising business, Snap said in a letter to shareholders.
Snap earned $1.11 billion in revenue from April through June, narrowly missing Wall Street’s expectations. But those estimates were already scaled back after Snap warned in May that this would be a rough quarter. The company also reported a net loss of $422 million, compared to $152 million during the same period last year.
“Our financial results for Q2 do not reflect the scale of our ambition,” the letter said. “We are not satisfied with the results we are delivering, regardless of the current headwinds.”
Here are a few takeaways from Snap’s poor earnings report:
Snap blames the economy and Apple (sort of)
Snap said economic headwinds like inflation are disrupting the digital ad market. Marketers have generally slashed their ad spending lately amid fears that the economy is headed toward a recession. Snap’s sales grew just 13% during the second quarter, a decline of 25 percentage points from the previous quarter.
Advertising spending “is among the very few line items in a company's cost structure that they can reduce immediately in response to pressure on their top line,” Snap CFO Derek Andersen said during the company’s earnings call. “We see this dynamic within our business as advertisers have lowered their budgets.”
On top of that, Snap is still grappling with Apple’s decision to restrict how users are tracked on mobile devices. Beginning in April, Apple allowed consumers to opt out of tracking by software apps, making it harder for them to effectively target users with ads. The social media firm is working to improve its ad measurement tools to show clients their campaigns are effective—without the availability of users’ personal information.
Although Snap didn’t call out Apple by name, its shareholder letter said recent “platform policy changes” have “upended more than a decade of advertising industry standards.”
The Rise of TikTok Doesn’t Help Either
Snap’s disappointing quarter can’t be blamed entirely on the economy or Apple’s privacy policies. The social media app noted it facing “increased competition,” too.
Snap is contending with the rise of TikTok, the Culver City-based video sharing app that was the most visited website in the world last year. TikTok is expected to generate more ad revenue than Snapchat and Twitter combined this year, Insider Intelligence researchers have predicted.
“Competition—whether it's with TikTok or any of the other very large, sophisticated players in the space—has only intensified,” Andersen said.
Snap has responded with a TikTok clone called Spotlight, which similarly lets users swipe through short-form videos. The company said users’ total time spent on Spotlight grew 59% year-over-year, and the number of monthly Spotlight users jumped 46% to reach more than 270 million.
Hunting For New Revenue
The vast majority of Snap’s revenue comes from advertising, leaving it particularly vulnerable to disruptions in digital marketing. Now, the company is trying to diversify its revenue streams to build a more resilient business.
Snap recently launched a paid subscription plan, called Snapchat Plus. The $3.99 per month service gives users “exclusive, experimental and pre-release features,” including early access to Snapchat’s new web browser version. If successful, that could bring in money directly from consumers instead of relying so much on advertisers.
The company wants to push further into augmented reality-driven e-commerce, too. Snap has already experimented with this, letting people virtually try on clothes with their smartphones. More than 250 million people have used AR shopping Lenses, the company reported Thursday. “We intend to focus on translating this AR engagement into AR revenue,” the shareholder letter said. Other revenue opportunities include Spotlight and monetizing its Map feature, the company said.
A Hiring Slowdown
With its revenue growth slowing, Snap announced Thursday that it will “substantially” lower its rate of hiring. In doing so, Snap joins other tech firms that have either slashed staff or paused hiring amid fears of a looming recession.
The company also announced Thursday that it signed long-term contracts with Snap’s co-founders, CTO Bobby Murphy and CEO Evan Spiegel, to serve in their respective roles through at least January 1, 2027.
Still Growing In Popularity
Snap’s outlook is considered gloomy for good reason. The company declined to provide a financial forecast for the current third quarter because “forward-looking visibility remains incredibly challenging.” The social media firm did reveal that revenue growth is “approximately flat” from a year earlier at the moment.
The bad news sent Snap’s stock sinking more than 26% in after-hours trading, where it sat at $12 per share as of 3:22 p.m. PT.
But it’s worth noting that the audience on the Snapchat app is still growing. Daily active users increased 18% year-over-year to 347 million. “The continued growth of our community increases the long-term opportunity for our business,” Spiegel said in a statement.
The problem, for now, is finding a way to monetize that community. (Disclosure: Snap is an investor in dot.LA)
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Snapchat users can now video chat with friends from their laptops.
The Santa Monica-based social media company still faces an uphill battle to compete with the video calling giant Zoom, which has been readily adopted in both academic and workplace settings—albeit with issues. Zoom has beaten other video calling platforms like Skype and become synonymous with on-camera conversation, but Snapchat’s social media mojo could help it gain traction with young users.
As in-person events become more common, Zoom’s moment as a social media platform from early in the pandemic is waning. That hasn’t stopped the company from launching a platform specifically for events.
As a social media company, Snap can capitalize on its app’s young user demographic, whereas Zoom remains primarily focused on the workplace. Users can quickly start calls with friends who are online with Snapchat’s video messaging, and the company will eventually incorporate the app’s augmented reality lenses. (Disclosure: Snap is an investor in dot.LA.)
While Snap faced a “challenging” first quarter, Zoom’s first quarter turned out to be better than expected.
Still, the move furthers Snap’s super app ambitions. Super apps consolidate a number of services into one platform, and many social media companies are turning to the concept to further engage their users. Snapchat isn’t the first social media platform to integrate desktop video calls—Facebook Messenger introduced the feature in 2015 and even expanded video calls to include 50 people at the beginning of the pandemic. Other competitors like Twitter and Instagram, however, are holding off on exploring video calls.
On the desktop messaging side, popular apps like WhatsApp, Slack and Discord have solidified their place on the web. Those apps also have free-to-use options, while Snapchat’s desktop features are only available through Snapchat Plus.
With its young user base moving away from Facebook and perhaps linking Zoom to school, Snapchat’s new feature has to potential to thrive in a social area where Zoom is struggling to grow.- As the Pandemic Recedes, Get Ready for Office Awkwardness - dot.LA ›
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