- Both social networks could face a protracted struggle with the ever-changing digital advertising market.
- Snap (NYSE:) has cash to weather the storm, but if the economy takes a turn for the worse, it looks unlikely the company will bounce back quickly
- Pinterest (NYSE:) is in the same boat; its stock is down 50%
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It is difficult to make a call to buy when the markets are in a sell-off. In the current economic environment, with recession risks looming, investors are fleeing high-growth technology stocks out of fear that these companies may not be able to meet their earnings targets.
One of the segments hardest hit by the current downturn in equities is social media stocks that rely on ad spending to boost their sales and investment appeal. In this group, we’ve shortlisted Snap and Pinterest for further scrutiny, looking at their current earnings momentum and the potential pitfalls of their small size.
Here’s a more in-depth look:
Snap: Coping with Slowing Ad Spend
The operator of photo-sharing app Snapchat was one of the most successful turnaround stories during the pandemic. Rising user numbers fueled sales as businesses of all sizes turned to social media platforms to reach homebound customers.
CEO Evan Spiegel and his team harnessed this traffic boom to increase the app’s appeal to advertisers. The Snapchat app attracted 332 million daily active users at the end of the first quarter. Sales during the period increased 38% to $1.06 billion.
But California-based Snap is unlikely to be able to sustain that kind of growth if the recession hits the global economy. The first warning came from the company itself when it told investors last month that it could not meet its profit forecasts as advertisers cut their ad budgets.
Since this announcement on May 23, the stock has lost more than 40%, wiping out nearly $16 billion of market value and reversing all gains made over the last five years.
Shares closed Monday at $12.02, after falling 9.5% for the day as a whole. It is down nearly 86% from a 52-week high of $83.34 in mid-September.
Although Snap has the cash to weather the storm, considering the current macroeconomic situation, it seems that it will be difficult for the company to recover.
With the current adverse macroeconomic environment suggesting that advertisers could reduce their spending on digital advertising, Snap also faces an existential threat from TikTok, which has 2.91 billion monthly active users.
TikTok, owned by the Chinese company ByteDance Ltd, is the most downloaded app in the world. As of 2020, Americans spend more time on TikTok than on Facebook (NASDAQ:) or Instagram. This year, the Chinese app is expected to overtake YouTube.
Pinterest: 50% drop
Among the smaller players in the social media space, San Francisco-based Pinterest has also been hit by the ongoing market downturn, though last quarter’s results beat expectations. Yet shares of Pinterest, which closed at $17.22 on Monday, are down more than 50% for the year as a whole.
The company runs a digital bulletin board of images and ideas on furniture, fashion, weddings, recipes and other topics, which allows users to scroll through a series of “pins” containing images or videos. Users can save pins to customizable boards to organize ideas of everything from vacation plans to dinner recipes to holiday shopping lists.
Pinterest management believes that its appeal to advertisers is very different from that of other social media companies, as users come to the pins with the intention of making a purchase. That makes advertising an integral part of the Pinterest user experience, rather than a negative.
Analysts at Piper Sandler said in a recent note that both social media stocks could be in a protracted fight with the digital ad market instead, adding that ad-reliant stocks are not great rebound candidates for investors. The note added:
“After a strong two-year run, digital ad spending appears to be normalizing. Group multiples have declined and are within 40% of recent highs, but history suggests multiples may not trade again until the ad spending growth bottoms out.
Piper Sandler cut her price target for Snap from $30 to $18 a share. For Pinterest, she cut it from $35 to $23 a share.
Even with share prices falling sharply, it’s hard to estimate a bottom line for these two smaller social media players. In a potential recession scenario, its big competitors like Alphabet (NASDAQ:) and Meta Platforms (NASDAQ:) are in a better position to weather an economic downturn.
Today’s market makes it more difficult than ever to make the right decisions. Let’s consider the obstacles:
- geopolitical turmoil
- disruptive technologies
- Interest rate hikes
To deal with them, you need good data, powerful tools to classify the data, and a good view of what it all means. You have to remove sentiments from investing and focus on the fundamentals.
For this, there is InvestingPro+, with all the data and professional tools necessary to make better investment decisions.