Snapchat owner Snap saw its shares fall by double digits after reporting lower revenues in the second quarter and predicting lower-than-expected revenues for the third quarter, sapping investor confidence.
Snap’s second-quarter revenue dropped 4 percent, to $1.07 billion, from the first quarter, according to the company’s July 25 earnings release. This is the second time in a row the firm has reported a decline in quarterly revenue. The first-quarter fall in revenue was the first such drop since Snap went public back in 2017.
Though the company managed to reduce its net loss by 11 percent, to $377.3 million, in the second quarter, it was the sixth consecutive loss for Snap. Meanwhile, the firm’s guidance for the current third quarter also turned out to be disappointing.
The company estimates its daily active users (DAU) to reach 405-406 million in the third quarter and its revenue for the quarter to be $1.07–1.13 billion. Both metrics were below market expectations.
The disappointing second-quarter results and lower guidance sapped investor confidence, and Snap shares fell from $12.51 on June 25 to $10.10 as of 11:37 a.m. EDT on July 26, a decline of 19.26 percent.
Company Facing Challenges
Speaking to Yahoo Finance, Scott Kessler, global sector lead for technology media and telecom at Third Bridge, raised concerns about Snap’s indication that it is facing some challenges.“The challenges could be coming from the macro backdrop, could be coming from the fact that, you know, they’ve been overhauling their ad technology and platform, or the fact that it is, in fact, a very competitive market,” he said.
“All of that put together means that there are, I think, continuing issues that Snap has to overcome. And investors are not especially patient, especially at this point.”
Snap has introduced multiple new features to boost its revenues. Earlier this year, the company updated its machine learning model to deliver more relevant ads to users. The update had initially caused some of its biggest ad spenders to see fewer “actions” like users tapping their ads.
However, advertisers are now beginning to see results from the changes, Snap insists. According to the company, there has been a 30 percent jump in “purchase-related conversions” for its ads in the second quarter compared to the first quarter.
Stock Downgrades
Over the past months, Snap has seen multiple downgrades. In December, Jeffries had downgraded Snap from Buy to Hold, stating that the revenue expectations of the firm were “too optimistic,” according to Yahoo Finance.Between Jan. 1, 2022, and Dec. 31, 2022, Snap shares fell from $47.80 to $8.95, a crash of over 81 percent. The slow advertising market and macroeconomic climate had hit the tech firm hard.
In a note to clients in January, Andrew Boone, an analyst at Citizens-owned JMP Securities, downgraded Snap stock from Market Outperform to Hold.
“We believe short-form video from TikTok, Reels, and YouTube Shorts are taking share of time from Snapchat’s Discover and Stories,” Boone wrote. “Importantly, these are Snap’s most monetizable surfaces as we expect impression growth to be pressured looking ahead.”
The downgrade “reflects our preference for Meta (valuation) and Google (search has higher revenue visibility) over Snap while both have more mature short-form video products, which we expect to attract more user time over the next few years.”
Snap has seen its shares rise by over 14 percent so far this year. However, the company’s lower third-quarter guidance and the subsequent stock slump are a cause for concern.
