Snap
SNAP
issued a reduced profit forecast in lieu of the ongoing economic disruptions, per a Wall Street Journal report.
Soon after the announcement, Snap witnessed a fall in its stock prices. The stock declined 28% in the after-hours trading. Shares of Snap have plunged 52.3% in the year-to-date period compared with the Zacks
Computer and Technology
sector’s decline of 28.3%.
Less than a month after issuing the guidance, the company is expected to revise those figures.
Snap filed an
8-K
, sharing that the macro environment deteriorated further and much faster than apprehended when it issued its quarterly guidance in the last reported quarter.
Amid the ongoing macroeconomic deterioration, Snap will most likely witness a fall in sales and profit compared with the initial estimates provided. However, Snap is yet to issue new financial expectations for the current quarter.
Though Snap’s revenue has grown steadily year-over-year, the growth rate is anticipated to be much slower this time around.
To cope with the ongoing supply-chain disruptions and inflation, the company plans to slow down hiring and spending and evaluate the remainder of its 2022 budget to look for additional cost savings.
Per management, 2022 will remain a significant investment year. The company plans to add 500 employees by the end of it, on top of the 900 people already added five months into the year.
Snap Takes Measures to Deal With The Economic Turmoil
Snap, which recorded its first quarterly profit in the fourth quarter, reported a net loss of $360 million for the first quarter of 2022, including an unrealized loss of $92 million on an investment.
In the last reported quarter, Snap had highlighted how it had been impacted by the disruptions in the digital ad market. This included the impact of rising inflation on advertisers, the privacy policy changes
Apple
AAPL
implemented and the impacts of the Ukraine-Russia war. The company continues to face the same in the ongoing quarter.
Last year, in April, Apple made a big change to its privacy controls, limiting the tracking capabilities of digital advertisers and enabling iPhone users to opt out of data sharing. Apple created two major challenges for advertisers. The company lowered the accuracy of the ad targeting, which increased the cost of driving outcomes. Then it made the measuring of those outcomes more difficult.
Snap continues to work through these platform policy changes, which are primarily impacting the company’s direct-response advertising partners. It has been working to build effective measurement solutions for advertisers to prove the efficacy of its campaigns.
Amid the ongoing economic turmoil, lack of revenue diversification is anticipated to be a major concern. Snap generates almost 99% of its revenues from advertising via AR Ads and Snap Ads.
Since inflation is now at an all-time high in 30 years, companies are being forced to either absorb increased costs and reduce their profit margins or raise their prices. Several companies have resorted to reducing their advertising and marketing spending to cope with the pressure. This decision will most likely affect Snap’s revenues in the near term.
Many companies have suspended all their marketing and media activity in Russia and Ukraine due to the war. Per the
World Federation of Advertisers survey
, of the 31 global brand owners representing, $43 billion in global ad spending has been forced to reallocate, reduce or completely cut off ad spending in Russia.
To cope with the economic disruption, Snap has been launching several new augmented reality products and services apart from controlling costs. It is shifting from just being a social media platform and diversifying its revenue-generation segments.
Snap, which has gained immense popularity among youths, is focused on developing its content, gaming and augmented reality platforms to enhance user experience.
Over the period of two years, this Zacks Rank #3 (Hold) company has invested in acquiring AR startups like NextMind, Wave Optics and Compound Photonics, among others, thus expanding its research and development team.
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.
The introduction of innovative AR offerings such as AR Lens, AR Bar and Scan have attracted millions of daily active users. Daily active users (DAU) at the end of the reported quarter were 332 million, up 18% year over year. Snap added 52 million DAU on a year-over-year basis
However, these steps have massively increased Snap’s research and development expenses, which rose 30.7% year over year in the last reported quarter, at $455.6 million. This might act as a headwind for the company.
Economic Disruption To Also Affect Other Social-Media Giants
Post Snap’s announcement, the U.S stock market also witnessed a fall in the stock prices of other social media shares, including
Meta
‘s
FB
Facebook,
Twitter
TWTR
and Pinterest.
Meta dropped 7% in the after-hours trading session, Pinterest fell 13% and Twitter declined 3.9%.
Other social media giants have also been dealing with the after-effect of Apple’s privacy policy changes and the impacts of the Ukraine-Russia war.
Earnings releases from Facebook, Twitter and others reflected a $278-billion fallout from Apple’s privacy changes, according to a report from Markets Insider.
After years of adding jobs rapidly, some of the fastest-growing global companies have gestured that they plan to take a more cautious approach to hire people.
The shift by these technology and social-media giants raises comes during a period of volatility in the stock market amid concerns over rising interest rates. Inflation also put pressure on the addressable market’s ad business, with advertisers pulling back amid rising costs.
Meta recently announced that it would be sharply slowing down its hiring process after almost doubling its workforce since 2018.
Twitter halted its hiring process and is looking for more ways to reduce costs.
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