Ad Market Weakness and Competition Weigh on Snap

The prospects for a sustained recovery in the shares of Snap (SNAP) appear dim due to ad-market weakness and increased competition.  Snap reports Q4 earnings results next Tuesday, which will be seen as this earnings season’s first major indication of the state of online advertising, a factor behind last year’s plunge in the stock. 

Shares of Snap plunged -81% last year but have risen +8% this year, equal to the performance of the Nasdaq 100 Stock Index ($IUXX) (QQQ).  Snap's last two earnings results were major disappointments and hammered the stock. Snap sank 28% the day after quarterly results were announced in October and tumbled 39% in the wake of its earnings announcement in July. 

Last week, JMP Securities downgraded Snap to market perform from market outperform, citing increased competition from Snap’s competitors.  The increased competition for ad dollars is another obstacle holding back shares of Snap from a sustained recovery.  TikTok, YouTube Shorts, and Meta Platform’s Reels have all emerged as platforms for short videos.  As a result, Brandes Investment Partners said, “the competitive environment has intensified for Snap, which is not a great situation when coupled with a slowing demand environment.”

According to Bloomberg data, analysts have lowered their estimates for Snap’s 2023 earnings by -21% over the past quarter and cut revenue estimates for 2023 by -1.6%.  In addition, the Information service recently reported that Q4 sales at Twitter dropped about -35%, and while that partially reflects advertisers pulling back after Elon Musk’s purchase, Bloomberg Intelligence said that the scale of the drop “doesn’t bode well for other digital-ad enterprises as companies pull back on sales and marketing spending due to a tough economic backdrop.”

A drop in the valuation of Snap is a positive factor for the stock.  Snap is trading at just 3.1 times estimated sales, just above an all-time low hit last year and well below its 10-year average of almost 12.  However, Third Bridge said, “in addition to a weaker economy, Snap faces many near-term and long-term issues with competition. The reality is that so far, it doesn’t seem like the steps the company has taken to improve its position have worked.”

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