Snap's revenue slowdown may paint a gloomy picture for other companies that rely on digital advertising revenue, as Big Tech gears up for a looming recession.
The company's shares plummeted more than 25 percent in after-hours trading on Thursday after a lackluster quarterly report, which noted slowing advertising revenue in the second quarter of this year. Revenue dropped 25 percent quarter-over-quarter, with Snap blaming "macroeconomic headwinds," including a predicted recession and changes to Apple's platform that limited the amount of third-party data shared with companies, as well as increased competition for digital advertising dollars.
More worrying, Snap withheld guidance for the third quarter, though it pointed out revenue so far remained flat. Refinitiv analysts had predicted an 18 percent year-over-year growth rate for the upcoming quarter. To rectify the losses, the company said it would slow down hiring and refocus its goals and initiatives. It also will initiate a $500 million stock repurchasing program to put more value into its stock-based compensation and help stabilize the value of its shares.
"While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition," Evan Spiegel, Snap CEO, said in a press release. "We are evolving our business and strategy to reaccelerate revenue growth, including innovating on our products, investing heavily in our direct response advertising business, and cultivating new sources of revenue to help diversify our topline growth."
Overall, Snap reported revenue of $1.11 billion, slightly below Refinitiv analyst expectations of $1.14 billion. It marked a 13 percent growth rate year-over-year, the slowest since Snap went public in March 2017. It also reported a loss per share of 2 cents, in line with analyst estimates.
Snap accounts for about 1.1 percent of the U.S. digital ad market, according to eMarketer. However, because it is one of the first social media companies to report earnings, investors often use it as a bellwether to predict earnings for larger tech platforms.
As a result of Snap's warnings, other digital platforms' shares took a tumble. Facebook parent company Meta saw shares fall 5 percent, while Google parent company Alphabet took a 3 percent dip. Twitter and Pinterest tumbled 1.9 percent and 6.9 percent respectively. Amid an ongoing legal battle with Elon Musk over him backing out on his purchase bid, Twitter is slated to report earnings on Friday. Meta, Alphabet, and Pinterest are set to report earnings in the upcoming two weeks.
Advertising agencies have warned of marketing budgets tightening as companies predict people will buy less if a recession happens. In addition, more digital competitors are offering advertising options that may be more effective at linking to a direct sale. And, with Netflix set to enter the advertising arena by early 2023, budgets may be divided even further.
