Snap could be ‘the canary in the coal mine’ for digital advertising as earnings highlight macro pressure

Snap Inc. added to jitters about the resilience of the broader social media industry with its latest earnings report, although its shares were heading higher in Friday morning trading.

Snap shares SNAP,
are known for taking double-digit swings after earnings, but were on course to end relatively muted on Friday following a mixed report. The stock rose 4.2% in morning trading after the company reported a lower-than-expected adjusted loss, but came in slightly below user growth expectations.

Additionally, Snap’s management team warned that macroeconomic conditions were causing some discomfort among advertisers.

“In the latter part of the first quarter, advertisers from a wider variety of industry groups raised concerns about the macro environment, including continued supply chain disruptions, rising costs inputs, economic concerns from rising interest rates, and geopolitical risk concerns from the war in Ukraine,” Chief Financial Officer Derek Anderson said on the earnings call.

See more: Snap’s stock rises despite shortfall amid ‘challenging operating environment’

The relatively more subdued move in stocks in Friday’s regular session follows choppy secondary market activity from Thursday, an overall dynamic that Bernstein analyst Mark Shmulik said was “corresponding” to the Snap’s current location.

“While there are no significant changes in the long-term story – in fact, progress looks promising – short-term uncertainty was the focus,” he wrote in a statement. note to customers. “We were hoping Snap was small enough to fly under the macro headwind radar, but alas, when it rains, everyone gets wet.”

He rates the stock to outperform and lowered his price target to $55 from $65.

FactSet, MarketWatch

MoffettNathanson analyst Michael Nathanson also noted Snap’s relatively small size, but questioned whether Snap was “the canary in the coal mine for the digital advertising industry.”

“While only a fraction of the size of Alphabet and Facebook, we believe Snap’s first quarter 2022 results provide insight into the potential macro impact on ad spend from rising advertising. inflation, supply chain shortages and the war in Ukraine,” he wrote in a note to clients.

GOOGL of Alphabet Inc. shares,

slid 1.7% in morning trading, while shares of Facebook parent company Meta Platforms Inc. FB,
fell 0.8%.

The fate of digital advertising has its nuances, however, with Nathanson writing that he expects direct-response advertising to fare better than branded advertising amid economic pressure. This already seemed to be confirmed in Snap’s latest results, as the company’s direct response business grew 43% year-over-year in the quarter, while brand advertising grew only by 26%.

He maintained a Buy rating on the stock, but cut his price target to $44 from $51.

Snap generates about three-quarters of its ad revenue from the direct response business, which “appears to have insulated its quarterly results from macroeconomic headwinds on brand ad spend,” Nathanson continued, though he doesn’t dare. Don’t expect direct response activity to be “completely immune” to macro clouds.

Looking at others in the ad industry, Nathanson noted that Meta Platforms and Google-parent Alphabet might hold up better than brand-focused services, and they “should be the last to cut marketing plans,” unlike to a platform like Snap, which could still be perceived as more “experimental” for advertisers.

“Nevertheless, it appears there could be a single-digit impact on digital ad revenue depending on Snap’s results,” he wrote of Facebook and Alphabet.

Morgan Stanley’s Brian Nowak called Snap’s performance “a bit of a yellow flag” for bigger players like Facebook and Alphabet, pointing out that Snap issued a weaker-than-expected report and outlook despite not derives only 15% of its income from Europe.

“[I]If Snap sees weaker results due to a tough macro environment, it’s hard to imagine the big platforms won’t see the impact either,” Nowak wrote. “Some of that nervousness may be priced… but it will be important to watch for revisions next week as we may have more cautious comments to come.

He has an overweight rating on the stock but has cut his price target to $55 from $59.

Shares of Snap have fallen 34.9% year-to-date, while shares of Alphabet have fallen 14.3% and Meta Platforms have fallen 44.5%. In comparison, the S&P 500 SPX index,
is down 8.9% this year.

About Cedric Lloyd

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