Snap’s advertising woes are bringing some of Wall Street’s worst fears to bear on the Internet sector.


Shares of Snap Inc. fell sharply on Friday as Wall Street scrutinized the company’s latest disappointing news that has the potential to shake up the broader internet sector as well.

Shares of Snapchat parent SNAP,
-30.06%
It fell more than 30% in Friday morning trading after the company’s latest earnings report, but sharp stock moves have become familiar to Snap investors this year. If current declines continue to the end, Snap shares will post their worst one-day percentage decline since July 22, when they lost 39%. The stock fell to a record 43% drop after the May earnings report.

Another internet stock, Pinterest Inc. Rushed after Snap with PINS.
-6.07%
Down 5.7%, Facebook parent company Meta Platforms Inc. META,
-2.49%
2.8% discount and Roblox Corp. RBLX,
-1.71%
It decreased by 2.1%. Alphabet Inc. GOOG shares,
-0.30%

GOOGLE,
-0.10%,
which owns Google, fell about 0.5%.

Snap announced its first share buyback program with its report Thursday afternoon, but revenue for the latest quarter fell just shy of Wall Street’s mark and posted the slowest growth on record. Snap executives appear to be expecting more pain this holiday season: In a letter to shareholders, they said advertising partners are cutting marketing budgets due to inflation-driven headwinds and cost pressures.

Executives declined to give a full forecast for the fourth quarter, telling investors only that it was “incredibly difficult” to see ahead.

While expectations for results were low given the stock’s steep year-over-year decline, Snap appears to have “lost all momentum,” with AB Bernstein analysts Mark Shmulik and James McNeil downgrading the stock to market outperform. outperformed and lowered its price target from $15 to $9 a share.

“Even usually reliable benchmark trends showed cracks, time wasted in the US. Premature 8K and lackluster guidance left investors confused despite management’s transparency intentions,” the analysts said in a note to clients.

Feedback: Snap investors, do you still trust Evan Spiegel?

Snap shares rose in late August after the company filed a filing confirming job cuts aimed at helping cut costs, but called for surprise sales growth. Some analysts raised expectations for the social media group based on sentiment from that filing.

A 5% year-over-year decline in the company’s “time spent” in the US was a common pain point among frustrated analysts. “Snap needs to solve the engagement problem quickly,” said a team of analysts at Evercore led by Mark Mahaney. He maintained a rating on the stock but lowered his price target to $14 from $17 and cut estimates.

Evercore’s team said Snap faces headwinds from macroeconomics, platform-related changes and competition from Google, Facebook and TikTok. On the platform front, analysts noted the lingering effects of Apple Inc’s privacy changes that make ad tracking more difficult.

Another downgrade came from MKM Partners’ Rohit Kulkarni, who downgraded Snap from buy to neutral and cut the fair value to $10 from $15. He said that “in 2022, Snap management overestimated its resilience to the macro/Apple headwinds, and in turn, this ineptitude exacerbated the micro-vulnerability in its business.”

“We now believe that Snap will struggle to control its own destiny over the next six to nine months,” Kulkarni said. His reasoning is that many advertisers view Snap as an “experimental platform,” meaning that marketers can cut their budgets on the platform first in times of economic weakness. He also said Snap showed “critical share loss for TikTok,” while the company has several management gaps that could hamper its medium-term performance.

As for competition and canary-in-the-coal mine fears, Snap management’s announcement of weaker brand spending could be a cautionary signal for Twitter TWTR.
-3.57%
and Alphabet-owned YouTube, the analyst said.

Twitter shares were also under pressure Friday, though it was unclear how much of the move was related to Snap’s comment on the ad market. Twitter is in the process of being bought by Tesla Inc.’s Elon Musk, but a report suggested that the US administration may be investigating Musk’s companies, including a pending $44 billion deal for the company.

Evercore’s Mahaney agreed that Snap’s earnings were potentially negative for the internet advertising sector, but he saw most of the disappointing headlines as company-owned. Meta and Alphabet, for example, are larger and may see the impact of “consolidation of ad spend.” Alphabet is also among the companies that deliver “highly measurable conversions,” along with Amazon.com Inc. Such companies may be in a better position.

In addition, he feels that Snap suffers from management gaps.

Mahaney cuts Snap revenue estimates for 2023 by 10%. “The headwinds for META and GOOGL will likely be less severe, and the headwinds for PINS will likely be less severe than for Snap,” he said.

RBC Capital Markets’ Brad Erickson and Logan Reich said bad Snap news in previous quarters proved to be “a bit of a red herring” when it comes to the larger sector, and that recent checks don’t show “meaningful macro headwinds.” wider industry.

Still, the pair cut estimates and cut their price target to $8 from $11, maintaining a sector rating. “We remain on the sidelines because we haven’t seen evidence that the platform can drive differential conversion and drive incremental dollars. We need to see evidence that SNAP can generate more sustainable spending that is less sensitive to macro pressures,” he said.

The current average price target for Snap is $10.99, up from $13.95 at the end of September, according to FactSet. And Global Equity Research currently has the lowest price target of $3 with a sell rating.



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