Snap earnings may be ‘canary in the coal mine’ for digital advertising, as they indicate macro pressures

Snap Inc.’s recent earnings report contributed to concerns about the social-media industry’s long-term viability, albeit its stock was trading higher in Friday morning trading.

Snap shares are known for swinging by double digits after earnings, but after a mixed report, they were on track for a comparably quiet finish Friday.

In morning trade, the stock was up 4.2 percent after the business posted a narrower adjusted loss than expected but fell short of user-growth estimates.

Additionally, Snap’s management team warned that advertisers were concerned about macroeconomic conditions.

“In the latter portion of Q1, advertisers in a wider variety of industry groups reported concerns related to the macro operating environment, including continued supply chain disruptions, rising input costs, economic concerns due to rising interest rates, and concerns related to geopolitical risks stemming from the war in Ukraine,” Chief Financial Officer Derek Anderson said on the earnings call.

The stock’s comparatively calmer performance in Friday’s regular session follows volatile aftermarket trading on Thursday, an overall dynamic that Bernstein analyst Mark Shmulik described as “fitting” given Snap’s current position.

“While there’s no material changes to the long-term story — in fact, progress looks promising — the-near term uncertainty was front and center,” he wrote in a note to clients. “We were hopeful Snap was small enough to fly under the macro-headwinds radar but alas when it’s rainy everyone gets wet.”

He downgraded the stock from outperform to underperform and decreased his price target from $65 to $55.

Snap’s small size was also observed by Moffett Nathanson analyst Michael Nathanson, who wondered if Snap was “the canary in the coal mine for the digital advertising sector.”

“Despite being a fraction of the size of Alphabet and Facebook, we believe Snap’s 1Q 2022 results give a preview into the potential macroeconomic impact on advertising spending from rising inflation, supply chain shortages and the war in Ukraine,” he wrote in a note to clients.

The stock of Alphabet Inc. sank 1.7 percent in morning trading, while Meta Platforms Inc., the parent company of Facebook, lost 0.8 percent.

However, the fate of digital advertising is nuanced, with Nathanson predicting that direct-response advertising will fare better than brand advertising in the face of economic pressure.

Snap’s latest numbers seemed to support this theory, as the company’s direct-response business climbed 43 percent year over year in the quarter, while brand advertising rose only 26 percent.

He kept his buy recommendation on the stock but lowered his price objective from $51 to $44.

The direct-response business accounts for roughly three-quarters of Snap’s ad revenue, which “appears to have insulated their quarterly results from macroeconomic headwinds on brand ad spending,” according to Nathanson, though he doesn’t expect the direct-response business to be “completely immune” to macro clouds.

When it comes to other companies in the ad industry, Nathanson believes that Meta Platforms and Google parent Alphabet will fare better than brand-oriented services, and that they “should be the last to be cut from marketing plans,” unlike a platform like Snap, which is still considered “experimental” by advertisers.

“Nevertheless, it appears there may be a single-digit hit to digital ad revenues as per Snap’s results,” he wrote of Facebook and Alphabet.

Morgan Stanley’s Brian Nowak described Snap’s performance as “somewhat of a yellow flag” for larger firms like Facebook and Alphabet, pointing out that Snap’s report and outlook were lower than expected despite the fact that Europe only accounts for 15% of its revenue.

“[I]f Snap is seeing weaker results due to a challenging macro environment, it is hard to imagine that larger platforms won’t see an impact too,” Nowak wrote. “Some of this nervousness may be priced… but it will be important to monitor revisions next week as we may have more cautious commentary ahead.”

He still maintains an overweight rating on the stock, but his price target has been reduced to $55 from $59.

Snap’s stock is down 34.9 percent year to date, while Alphabet’s stock is down 14.3 percent and Meta Platforms’ stock is down 44.5 percent. In comparison, the S&P 500 index has dropped 8.9% this year.

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