The Ratings Game: Too little, too late? Snap stock plunges as turnaround remains a work in progress

The Snapchat parent company called out a “difficult operating environment” in a shareholder letter accompanying the report, noting that factors such as “macroeconomic headwinds, platform policy changes, and increased competition” weighed on results in the past year.

Chief Executive Evan Spiegel added on the earnings call that Snap’s direct-response advertising business increased in the latest quarter, though the company is also dealing with some growing pains as it works to improve this part of its product. Direct-response advertising refers to getting quick reactions from users and potential customers — in contrast to brand advertising, which marketers use to shape the broader perception of their companies over the long run.

Opinion: Snap stock has lost the one thing it had going for it

Benchmark Research analyst Mark Zgutowicz suggested that Snap’s direct-response product and other improvements seem to be too little, too late as he downgraded the stock to hold from buy.

The company’s return on ad spending within direct-response “has never been competitive,” he said. Further, the changes Snap is making “with fingerprinting/probabilistic targeting” in response to Apple Inc.’s
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privacy policies are at “significant risk” of being “being officially outlawed” by Apple down the line.

Zgutowicz noted that Snap is working to retrain its machine-learning models, a change he thinks the company should have implemented sooner.

“Snap’s delay not only leaves them even further behind the social returns curve, the ‘long-term’ hope that new and improved [algorithms] can deliver competitive scaled returns points well beyond 2023, in our view,” he wrote.

UBS analyst Lloyd Walmsley also worries about where Snap stands in the competitive ecosystem.

“On the upside, we see potential [revenue] reacceleration on solid user growth and traction on ad tech driving eventual spend,” he wrote. “On the downside, we see increasing competition everywhere.”

Beyond threats from TikTok’s ascent, Meta is making progress on monetizing its Reels format and YouTube is scaling up its Shorts product, wrote Walmsley, who downgraded the stock to neutral from buy while keeping a $10 target.

Bernstein analyst Mark Shmulik likened Snap to a “snow globe in a snowstorm.”

“While Snap scrambles to build a competitive performance-marketing ad product, it barely registers as progress against the heavy revenue headwinds driving the company into ex-growth territory,” he wrote.

In Snap’s investor letter, the company noted that year-over-year revenue was off 7% to start 2023 and that the company’s internal forecast is for a 2% to 10% revenue decline for the first quarter.

The rebuild of Snap’s direct-response product has weighed on performance to start the year, but it’s “unclear if an improving product can offset continued brand spend softness,” Shmulik wrote. He rates the stock at market perform and cut his price target by a buck to $9.

Piper Sandler analyst Thomas Champion titled his note to clients: “Macro Remains A Tough Slog.”

“Changes to the ad product may be layering on to a challenged macro environment,” he wrote. Recent job cuts represent “a positive step and commitment to operating rigor,” but stock-based compensation is still “elevated.”

He rates the stock at neutral with a $9 target price.

RBC Capital Markets analyst Brad Erickson thinks Snap will remain a market-share “donator” given a lack of “visibility to performance improvement or other monetization offsets.”

“Once again (and in some ways more than ever), we believe SNAP’s … decelerating ad business demonstrates that its issues are company-specific and not macro-related, with management saying its impression of overall ad spend hasn’t gotten worse (implying since last qtr),” Erickson wrote.

Ahead of Meta’s Wednesday afternoon report, he gets an “in-line” read-through from Snap, noting Snap’s comments on how the ad environment didn’t seem to worsen and also highlighting Meta’s “low” exposure to brand spending. For Alphabet, the read-throughs are “in-line/better given depressed sentiment.”

He titled his report “IdioSnapCratic” as he maintained a sector-perform rating and a $10 target price.

Evercore ISI analyst Mark Mahaney, meanwhile, saw a “negative” read-through for other digital-ad companies, though he acknowledged that “many of the issues at play are Snap-specific.”

“Industry datapoints and channel checks had pretty clearly suggested ad revenue softening throughout [the fourth quarter] and into [the first quarter], so SNAP’s results aren’t perhaps too surprising,” he wrote. But at the same time, Snap is being affected by its exposure to brand advertising, its status as a “2nd tier ad platform” in a world of budget rationalizations and its changes to its direct-response product.

“SNAP is between a lot of hard rocks right now,” he wrote, meaning that the challenges for big ad players Meta and Google “are likely to be notably less severe,” while the problems for smaller Pinterest Inc.
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“are likely to be modestly less severe than they are for SNAP.”

Mahaney has an in-line rating and $12 target price on Snap’s stock.

Meta shares are off 0.5% in morning trading Wednesday, while Alphabet’s are roughly flat. Pinterest shares are off 1.7%.