Snap shows ad market’s nightmare ‘becoming a reality’: Morning Brief

Snapchat (SNAP) had its worst day ever on Tuesday.

Shares of the company fell 43% after messaging to shareholders that the “macroeconomic environment” would weigh on earnings in the current quarter.

Big tech giants like Amazon (AMZN), Alphabet (GOOGL), Apple (AAPL), and Meta (FB), all saw their shares fall in Tuesday’s trading session. Even though Snapchat is only a fraction the size of these companies, something about the updated guidance spooked tech investors in what has already been a bloody 2022 for those stocks.

For a possible answer, we need look no further than BofA Global Research’s note on Tuesday entitled, “Ad recession concerns becoming a reality.” The thesis: the base of advertisers paying Snapchat for pre-roll ads or integrated content is the same base of advertisers paying Google. Or Pinterest (PINS). Or the company formerly known as Facebook.

“[W]e expect a sentiment overhang on the Internet group until 2Q earnings in July,” the note reads. Analysts at Jefferies echoed this view, arguing in a note Tuesday that they believe it’s “highly unlikely” ad market weakness is isolated to Snap.

This “overhang” led the Nasdaq (^IXIC) to slide 2.3% on Tuesday, extending a 2022 market sell-off triggered by economic shutdowns in China, the war in Ukraine, and, of course, the Fed pulling the punch bowl. The tech index is now at its lowest level since November 2020.

Snapchat’s other problem? It isn’t the amount of users on the app that spooked investors — the company handily beat Wall Street’s estimates on global daily active users last quarter, reporting 332 million as of March 31. Rather, it’s all about the cash, a theme we’re hearing from once growth-obsessed companies.

If “macroeconomic environment” means fears of a recession, then the concern is a drying up of advertising dollars that keep the lights on at Snapchat — not how many people are using dog ear filters.

But Snapchat is no stranger to dramatic ups and downs in its stock price. And interestingly, those swings have been closely tied to the market read on its much larger social media peers as well.

In February, Meta reported poor revenue guidance and blamed privacy changes to Apple’s iOS mobile system. Snapchat shares lost 20%. What happened after the bell? Snap reported its own earnings, said it had achieved a net profit for the first time, and shares about doubled the next day.

How about the quarter before that? The company missed on revenue expectations, teased the impact of the iOS changes, and then the stock sold off by 25%.

Call it the “macroeconomic environment” or “something about iOS,” the story for these companies hinges less on user counts than it does on the ad dollars.

Especially in a fragile financial environment where the word “recession” is floating around, cash is far from trash — it is a survival strategy for tech companies that are apparently making the transition from “growth” to “value.”