Author: Ian Whittaker
Snap’s shares fell nearly 27% on Friday post-the publication of their Q3 results on Thursday. Here are some thoughts on the numbers and the implications for the stock (and other names such as Twitter and Facebook). As usual, all thoughts and comments welcome.
Snap’s results were a mixed bag when it came to expectations. It beat adjusted Earnings Per Share (“EPS”) expectations – 17c for Q3 vs 8c consensus expectations according to Refinitiv – as well as global Daily Average Users (“DAUs”) – 306m vs 301,8m consensus. However, it missed on the key metric that the market looks for with Tech stocks, namely revenues. Q3 revenues came in $3m less than the bottom end of guidance at $1.07bn vs $1.10bn consensus (as an aside, that also meant Snap underperformed consensus on Average Revenue Per User (“ARPU”) - $3.49 vs $3.67).
A revenue miss never provokes a good reaction from investors, especially when Snap has had a good track record in recent quarters of beating expectations and the implicit assumption that management will guide conservatively.
However, that impact was compounded by their Q4 guidance. Snap guided to $1.16bn - $1.20bn revenues for Q4, much lower than the $1.36bn Refinitiv consensus. That guidance equates to 27%-31% Year on Year (“YoY”) revenue growth, far below the 57% YoY growth of Q3 and the 73% YoY growth of the Trailing Twelve Months (“TTM”).
The initial reaction might be to think that, even with the revenue miss, wiping well over $30 billion off the market capitalisation of Snap might be excessive. Well, there are two reasons why this happened. The first is a general point. The valuation of perceived Tech stocks (I say perceived because Snap and companies like Facebook are, in my mind, media names) rely greatly on the market’s expectations of future growth. Most Tech stocks will be valued using a Discounted Cash Flow (“DCF”) model and most of the value will lie in the Terminal Value (“TV”), which is the long-term, ongoing value of the company. If investors’ belief in the long-term story is dented, as here, then the value will fall.
Secondly, and probably a greater factor here, are the reasons Snap gave as to why it both missed on revenues and its Q4 guidance was so muted namely (1) Apple’s changes as part of the iOS 14.5 rollout, which have impacted advertisers’ ability to track consumer data and (2) macro issues such as problems with global supply chains, labour shortages etc which are impacting companies and which, Snap said, is persuading many to ease back on advertising because companies do not want to be receiving orders on which they cannot deliver.
Personally, I am surprised by their comments on (2). Several of the global Agency groups, such as Publicis and Omnicom, have reported their Q3 results and have not mentioned such macro issues impacting their Q4 trading, although they have both cited uncertainty on the macro front. Given both the global nature and client mix of Agencies, they should be canaries in the coal mine. Nor have companies generally in the Q3 reporting season stated that macro conditions are stopping them pushing for sales, with some exceptions (e.g. autos).
This raises questions as to whether Snap’s issue on the macro front is more to do with its mix of clients and / or its offering.
Management sidestepped a question on the conference call as to which of its sectors were particularly impacted by the macro conditions but it would make sense, for example, if Snap had greater exposure to cars, where companies have shut down car plants because of semiconductor shortages. Another possibility, and more worrying from a Snap perspective, is that if Snap is not seen as “must have” by advertisers and so they have focused their advertising spending on bigger platforms such as Facebook and / or switched advertising spending to Apple. Facebook’s results due on Tuesday evening will provide clues to that (as will Twitter’s later today).
However, the biggest underlying problems probably stem from the changes made by Apple as part of its iOS 14.5 rollouts. Snap management emphasised on the call how much the changes had reduced visibility for advertisers, particularly in the Direct Response (“DR”) part of the business, which is over 50% of the business. The impact had accelerated as Q3 progressed and was expected to hit fully in Q4. Moreover, while the Brand part was less impacted by Apple’s changes (although it was by the macro issues), Snap stated that the problems impacting Brand and DR separately are having a compounding, negative effect on revenues, particularly in the auction system.
What was clear is that the issue is not going away any time soon.
Snap highlighted the various steps it has taken to try and improve advertisers’ visibility and emphasised how the problem lies with advertisers’ lack of visibility rather than the usefulness of the Snap platform itself. It also highlighted that Apple’s SKAdNetwork (“SKAD”) was seen by many advertisers as inflexible and that the results thrown up by SKAD had increasingly become “unreliable”. Finally, it stated how it was trying to develop solutions around its own first-party data.
However, as Snap pointed out, its first party data solutions lack the ability to compare with other platforms, which is a major issue for advertisers. What is more frightening for Snap – and which should be frightening for other players such as Facebook and Twitter – is that Apple’s iOS14.5 move is only the first step. Management referenced further changes coming through when Apple rolls out iOS15. The nightmare scenario is that Apple’s continual rollout of new changes makes it increasingly harder for platforms such as Snap to develop a stable, long-term solution (as any solution is immediately superseded by changes in another rollout) and, eventually, advertisers lose faith and shift revenues elsewhere. Given Apple’s gains in advertising since it introduced its changes (https://on.ft.com/3EeAQ8s), it has an obvious incentive to push further changes through.
What can Snap do? As mentioned above, it is trying to develop its own first party data solutions. It is also highlighting the opportunities available through Augmented Reality (“AR”) which it sees as a big opportunity, as well as the growing content on its platform, as highlighted by its comments on the growing amount of content on Spotlight.
However, the problem for Snap is that many of the problems it faces are outside of its control and, in the case of Apple’s privacy / consumer changes, are not only likely to continue but may also accelerate, which means that Snap gets locked into a game of continually trying to catch up to changes it cannot necessarily anticipate. Nor does it have the scale of first party data to reassure advertisers and, to put bluntly, there is a question as to whether it is seen as “must have”.
What are investors likely to do?
Even with the share price fall, Snap trades at what looks like c. 16x 2022E EV / Revenues, although that will not reflect analysts’ forecast reductions over the next few days. More to the point, many of the issues with Snap are (1) outside their control and (2) not short-term. Investors are likely to be very cautious. This sort of results’ shock – where results have missed expectations, guidance is weak and a range of structural fears are brought to the fore – usually causes weak sentiment to linger.
The one caveat to that is that Snap may become more of a M&A target, although there are problems, not least it is still a near $90bn market cap company. Moreover, some of the most logical buyers – Facebook, for example – would likely face anti-trust issues while Apple may ask why it needs to buy Snap given it is gaining so much advertising share. A non-US entity may look to buy Snap (although a TikTok bid, for example, may raise political issues). Another option is for Snap to attempt its own M&A. It may decide to try and buy scale by bidding for Pinterest (where PayPal has just announced it is no longer bidding) but that might be seen as not particularly attractive by investors
Two final points. Firstly, one other area of issue to raise is one similar to that which Netflix faces, namely Snap’s DAUs are rising quickest in areas with both the lowest ARPUs and ARPU growth and slowing most quickly in the highest ARPU / ARPU growth area i.e. North America. In Q3, DAUs rose 7% YoY in North America (“NA”) and 49% in the Rest of the World (“RoW”), which is ex-US and Europe. Yet, NA ARPU grew 49% YoY to $8.20 whilst RoW ARPU grew only +3% to $0.98. While there are quarterly fluctuations. RoW ARPU growth looks likely to be limited, at least in the short-term.
Finally, what does that mean for similar companies in the social media area? We will learn soon enough. Twitter reports its Q3 results this evening and Facebook post-market close tomorrow. My feeling is that there is more risk for Twitter which, like Snap, may be seen as not in the “must have” category for advertisers and / or does not have the scale of first party data to build credible alternatives. Facebook does have scale and data but it is hard to imagine it will not be impacted by the changes, although the impact may be more limited than for Snap. However, the fact that both shares fell sharply post-Snap’s comments, suggest investors are nervous that Snap will be the canary in the coal mine for other groups.
For further insights and articles, subscribe at www.ianwhittakermedia.com
About the Author
Media / MarTech / Tech Analyst, twice City AM Analyst of the Year; Founder, Liberty Sky Advisors; Chair and Board member; Member Of The Advisory Board Songtradr. Consultant to JC Decaux UK, City AM and Campaign columnist