Snap’s stock investors risk more pain on advertising woes

SNAP Inc’s shares are trading near their cheapest valuation on record, but a myriad of headwinds has investors doubtful over the prospect of a sustainable recovery ahead.

The Snapchat parent will report its fourth-quarter results on Tuesday (Jan 31), and the results will serve as the season’s first major indication of the state of online advertising, a factor behind multiple recent blow-ups in the stock.

Besides advertisers pulling back on spending in response to a bleaker economic outlook, Snap has also struggled in the battle for ad dollars. TikTok, Alphabet’s YouTube Shorts, and Meta’s Reels have all emerged as platforms for short videos, posing competition that has pushed JMP Securities to downgrade Snap last week. Netflix’s ad-supported subscriber tier, meanwhile, represents a new way for marketers to reach millions.

“The competitive environment has intensified for Snap, which is not a great situation when coupled with a slowing demand environment,” said Brent Fredberg, director of investments at Brandes Investment Partners. The online ad sector “remains highly speculative, with more risk, and you’ll likely continue to see heavy volatility in these stocks”.

Snap’s past two earnings reports were brutal for the stock, which sank 28 per cent the day after results in October, and 39 per cent in the wake of the July announcement, which followed a cut forecast in May. Snap averaged a 20.4 per cent move following its results, and Wall Street expects a similar-sized reaction this quarter, with the options market implying a one-day move of 21 per cent.

The shares fell 81 per cent in 2022 and have risen 8 per cent this year, equal to the performance of the Nasdaq 100 Index. 

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Analysts predicted on average that Snap’s adjusted earnings fell by almost two-thirds, with revenue up 0.5 per cent. While that would represent the slowest revenue growth on record, the question is whether even that is too optimistic. 

The Information recently reported that fourth-quarter sales at Twitter are down about 35 per cent, and while that partially reflects advertisers pulling back from the service after Elon Musk’s purchase, Bloomberg Intelligence wrote 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”.

Analysts have lowered their estimate of Snap’s 2023 earnings by 21 per cent over the past quarter, and the view for revenue has come down 1.6 per cent, as indicated by data compiled by Bloomberg. 

Still, Snap looks cheap relative to its own history. The stock is trading at just 3.1 times estimated sales, not far from an all-time low it hit last year, and a fraction of its long-term average of almost 12. While it trades at nearly 50 times estimated earnings, the price-to-sales ratio is below that of Alphabet, Pinterest, and the Nasdaq 100, while being about even with Meta’s. 

“It’s possible Snap could start to appeal to value investors, but everything starts and ends with its prospects from a fundamental perspective,” said Scott Kessler, global sector lead for tech, media, and telecom at Third Bridge. “In addition to a weaker economy, it faces a lot of near-term and long-term issues with competition. The reality is that, so far, it doesn’t seem like the steps it has taken to improve its position have worked.” BLOOMBERG