Snap Q2 Reaction: Investors Shouldn’t Be Shocked by Bad Results

Snap Q2 Reaction: Investors Shouldn’t Have
Cheyne Gateley/VIP+

Snap’s stock cratered more than 25% after hours following its second-quarter earnings results Thursday afternoon.  

But why?  

Didn’t the company already warn it would be missing Q2 revenue and EBITDA guidance?  

Don’t we know that the economy was slowing down?  

Didn’t we know that advertising would likely see a slowdown?  

Isn’t everyone already bracing for a recession? 

Yes, it was the weakest quarterly revenue growth since becoming a publicly traded company. And yes, the company withheld revenue and EBITDA guidance for Q3 due to “uncertainties related to the operating environment.” But it still shouldn’t have been this big of a surprise. 

Snap previously warned in an SEC filing at the end of May that it would most likely be missing its Q2 revenue and EBITDA guidance. Then rival social media company Meta CEO Mark Zuckerberg came out with his own warning about economic deterioration at the beginning of June.  

Snap was the first of the major social media giants to report this earnings season, and with the poor Q2 results, it’s hard to imagine any better news out of peers Meta, Twitter and Alphabet. The cracks have been forming for some time now, and management all but confirmed that there will likely be more pain ahead. 

It was a brutal earnings conference call. To sum up the call as simply as possible, Snap’s management is worried. CFO Derek Andersen said that the company is facing many macroeconomic headwinds that will likely persist for the foreseeable future. 

“As we enter Q3, a lot of the headwinds continue to be as significant as they’ve been at any point they’ve been recently. [It is] unclear how those headwinds will evolve,” Andersen warned. He also mentioned increased competition from rivals like TikTok. “The overall advertising pie is growing at a smaller rate.” 

The majority of Snap’s revenue comes from direct response advertising, which is particularly difficult because direct response advertising is the first to be slashed from budgets when a company is under pressure. At least that’s what Snap’s management kept saying repeatedly. 

The biggest question on the minds of analysts and investors alike is whether this revenue growth deceleration for Snap and its peers is transitory. 

Digital advertising was one of the few bright spots amid a broader ad spending decline during the COVID-19 pandemic. Unfortunately, the future forecast is gloomy for social media advertising through 2023. Social media ad revenue in the U.S. is expected to grow 10.5% in 2022 and just 8.7% in 2023, according to Magna Global.  

Snap was just the first one out of the gate, and the bad news will likely continue to trickle out in the next few weeks as other digital advertising giants like Alphabet, Twitter and Meta release their results and possible forecasts for the future. Perhaps investors need to further prepare themselves for the grim reality that the pressure on digital advertising companies will only grow from here for the time being.