Snap Crackles and Pops After Disappointing Investor Update
The company reported its slowest revenue growth rate in years.
Snapchat parentSnap(SNAP-39.08%)reported fiscal 2022 second-quarter earnings after the markets closed on Thursday, July 21. The social media company disappointed investors by reporting slower-than-expected revenue growth. Snap had warned the market several weeks earlier that its second quarter was evolving worse than expected, but these results on July 21 managed to disappoint already lowered expectations.
The stock was down as much as 38% on the day following the release, a dramatic fall for the once-loved business. Let's dig into the details of that Q2 report and decipher what is causing the poor performance.
Snap manages to disappoint already lowered expectations
Snap had first forecasted revenue growth between 20% and 25% for its second quarter of 2022. Roughly a month after those projections, Snap said the quarter was moving in the wrong direction, andit would miss even the lower end of that guidance. When it finally revealed Q2 figures on July 21, Snap reported revenue increased 13% year over year. From 2018 to 2021, the company had grown revenue at an average compound annual rate of over 50%, so the Q2 growth was a considerable slowdown.
SNAP REVENUE (ANNUAL YOY GROWTH)DATA BYYCHARTS
The primary cause of the slowdown is a platform policy change byApple, making it more difficult for Snap to collect data on its users. That feature allowed Snap to sell targeted advertising to its partners, who appreciated the precision. No longer were marketers showing advertisements for a concert in Los Angeles, California, to sports fans in Orlando, Florida. It also meant that advertisers were willing to pay more per ad because there was less wasted spending.
With the changes in Apple's privacy policy, the level of precision that can be delivered has considerably lessened. As a result, marketers have lowered their willingness to spend on Snap. That's bad news for Snap because it is more of a longer-lasting structural headwind, which can explain why the stock is falling so hard. This is not something Snap can fix overnight, or a macroeconomic issue that will resolve itself over time.
Snap's stock is not a buying opportunity, even at the lower price
SNAP PRICE TO FREE CASH FLOWDATA BYYCHARTS
Importantly, asI wrote a few weeks ago, Snap'sstockwas expensive heading into the Q2 report and remains costly even after the drop. Trading at a price-to-free cash flow ratio of 78, even though it is near the lowest it has sold for in the last year, it is still expensive on an absolute basis. Furthermore, a premium valuation like this is typically reserved for a company with excellent and improving prospects, which is not the case for Snap as the headwinds from Apple's privacy changes will constrain revenue growth longer term. This is not a time for investors to buy the dip.
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