Snap Inc. recently reported its quarterly results and forecast, which were met with disappointment. The company's performance, coupled with a recurring excuse, raises questions when compared to other internet ad-dependent companies like Meta Platforms and Alphabet.
Falling Short in Revenue and Outlook
Snap announced a revenue miss for the fourth quarter, and its outlook for the first quarter was equally disappointing. The company revealed a wider Ebitda loss than anticipated by Wall Street analysts. Following this announcement, Snap's shares plummeted by 32.4% in after-hours trading. Interestingly, this came just a day after the company announced its plans to downsize its workforce by another 10%.
Concerns about Slower Growth
Analysts on Wall Street have expressed concerns about Snap's slower growth rate compared to other companies that rely on internet ads. In the fourth quarter, Snap experienced only a 5% revenue growth. According to the company's investor letter, it attributed 2 percentage points of the revenue growth slowdown to the conflict in the Middle East. The Middle East proved to be a headwind for Snap in the third quarter as well.
Forecasted Revenue: A Modest Increase
Snap's forecast for the first quarter indicates revenue ranging from $1.095 billion to $1.135 billion, suggesting a year-over-year growth of 11% to 15%. While this projection may seem modest, it pales in comparison to Meta's recent announcement. Meta anticipates first-quarter total revenue in the range of $34.5 billion to $37 billion, with growth ranging from 20.63% to 29.37%.
Questions Regarding Meta's Impact
During a Q&A session, Rich Greenfield, an analyst with LightShed Partners, inquired about Meta's outlook for 30% revenue growth this quarter and its substantial scale. Greenfield also questioned whether Meta's aggressive investment in machine learning and AI was restraining Snap's growth potential.
Also read: Meta’s killer stock rally adds $200 billion in market cap — a historic haul.
Snap's Growth Potential and Transition to Direct-Response Ads
Snap co-founder and Chief Executive Evan Spiegel expressed optimism about the enormous opportunity for the company to continue growing its business. With a user base of 800 million, Snap has primarily operated as a "brand-focused ad business." However, it has now shifted its focus towards direct-response ads, a transition that poses challenges for companies more oriented towards brand advertising.
While Snap acknowledges the need to catch up in the direct-response ad space, there is evidence that their efforts are yielding positive results. The fourth quarter typically sees heavier brand advertising activity for Snap. However, according to Jasmine Enberg, Principal Analyst at Insider Intelligence, brands tend to be cautious during times of conflict or crises, resulting in a potential reduction in spending. Additionally, as a smaller player, Snap's advertising struggles may be more noticeable compared to major platforms like Meta.
Enberg further explained that despite Snap's ongoing efforts to enhance its direct-response ad business, it faces difficulties in masking its weakness in brand advertising. The slower ad spending partially attributed to the Middle East conflict reflects larger issues within Snap's ad business, specifically its lack of scale and sophistication when compared to its rivals.
Benchmark analyst Mark Zgutowicz highlighted the company's shortcomings in direct-response software (DR-stack) and expressed skepticism about the sustainability of higher revenue levels. Presently, investors find themselves in a wait-and-see mode, hopeful that Snap can overcome the challenges posed by a highly competitive advertising environment dominated by industry giants like Meta and Alphabet.