Snapchat (NYSE: SNAP) reported revenue of $1.6 billion at the end of Q3, which was less than expected by Wall Street analysts, but a 6% increase from the same period compared to a year ago. Currently, the company faces many challenges ranging from inflation, fierce competition, and a decline in the number of users to a reduction of revenue from advertisers, a significant source of income for the social media giant. Shares of Snap dropped by 25% after the earnings report was released recently.
The social media industry is currently facing tough times. A look at SNAP earnings and revenue health is used as a yardstick to measure the performance of other companies in the social media space, as whatever affects one would affect the other since they share similar business models.
Snapchat’s May report increased the anxiety level among tech investors when it claimed the economy declined faster than expected, resulting in low profit and revenue. Policy changes in privacy by Apple also affected the company as it was increasingly difficult to target users with personalized ads.
As much as the condition is not favorable, Snapchat has still managed to grow its daily active user base count by 19%. This is an act of resilience on their part. In a letter addressing the recurrent losses, SNAP has said that they remain optimistic about their long-term opportunity based on the growth of our community and engagement. However, one should look away from such a market sector when considering investments.
Other ad-reliant companies in the social media industry, such as Meta (NASDAQ: META), Alphabet (NASDAQ: GOOGL), and Pinterest (NYSE: PINS), were also affected. They all experienced a dip in their stock prices following the report. As estimated by Reuters, the stock sell-off during that period may have probably resulted in a $4 billion loss from those companies.
The competition from TikTok could also be another reason behind the slow growth and poor earnings. TikTok appears to be more appealing to young users and mature people across the globe. Also, it is easier for users to get engagements and a more significant number of followers on TikTok compared to Snapchat.
A growing user base attracts potential advertisers to any social media platform. While the daily user base of Snapchat is growing, analysts have predicted a slow increase in the pace of the daily user base within the next few years. The DAU (Daily Active Users) is the key metric potential investors look at before investing in stocks from any social media platform. This indicates whether the social media company can win contracts and deals from advertisers and brands.
Snapchat’s shares have seriously declined over the past year by about 86% compared to an 18.6% decline in the S&P 500 Index. The earning history of Snapchat has been plagued with annual losses for over seven years till 2020. They, however, managed to make an annual profit in 2021 when they posted positive quarterly EPS. Losses continued in 2022 for the last three quarters of the year.
Revenue growth might have consistently increased annually in the last three years; its pace is slowing down after dropping to 13.1% from the projected 48% growth. In fact, Analysts expect another slowdown to 5.8% in the next three months.
It is advisable to halt the decision to buy any social media stocks until other solid monetization and revenue-generating plans have been devised by any of the key players in the social media space.
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