Snap Inc. (SNAP, Financial) is a company that owns the popular social media platform SnapChat, which has seen its fortunes tumble at a more worrying pace than its peers. As a result, the stock took a major hit last year during the stock market rout, and its performance remains choppy since the start of the year. Much has to do with its underlying business, which continues to struggle due to increased competition, disruptions to its ad business due to Apple's (AAPL) app privacy changes (old news now but still relevant) and weaker advertising demand amidst a struggling economy.
Latest earnings
Snap is operating in a remarkably challenging environment which is likely to weigh down its financial results substantially in the upcoming quarters. Its first quarter results saw its sales drop by 7% to $988.7 million. On a more positive note, though, it managed to pare down its net loss to $328.7 million, a 9% improvement from the same period last year. Moreover, it reported a marginal improvement in daily active users and engagement.
The advertising market has slowed down over the past few quarters and is expected to post modest growth this year according to Snap. Consequently, Snap's internal second-quarter forecast indicates more pain ahead for its shareholders. Its second-quarter sales are estimated to hover around the $1.04 billion mark, indicating a potential drop of 6% year-over-year.
To add to its woes is the looming specter of a recession, which should put a bigger damper on ad spending through the close of this year. This could potentially keep Snap's top line under major duress for an extended period. Yet, it's not just economic conditions that could throttle its growth.
The crowded social media landscape poses a formidable challenge for the business. For instance, short-form video juggernaut TikTok ended last year with a whopping 1.7 billion users, showing no signs of slowing down. Other platforms, such as Meta's (META, Financial) Facebook, attract a daily active user base of more than 2 billion. Therefore, Snap is up against behemoths doing much better to keep their user bases engaged and attract more advertisers.
Snap reported its first-ever decline in sales during its most recent quarterly report, and the trend is likely to continue in the upcoming quarters in my opinion.
Snap has been more susceptible to Apple's privacy changes than many competitors as it is a smaller platform than larger advertising platforms such as Alphabet's (GOOG, Financial)(GOOGL, Financial). This is mainly due to the lack of traction towards small to medium-sized businesses and the limited ability to harvest data for ad targeting outside the scope of Apple's domain.
In response to these challenges, Snap's management is looking to implement a new ad format and investing heavily in machine learning. The goal is to expedite the ranking of content and ad platforms to increase its growth rates substantially. However, these changes will take time to implement and yield results, marking a transition period for the business.
AI and AR investments could bear fruit
Snap is looking to revive its innovative spirit to effectively enhance its platform, making it more appealing to both users and advertisers. A major step in this direction is the introduction of My AI, an artificial intelligence (AI) feature powered by ChatGPT. Since its launch, ChatGPT has garnered a staggering user base of more than 100 million within a few months. Snap recently introduced its unique chatbot My AI, which e"fficiently balances innovative functionality with essential privacy considerations."
Snap's dedication to innovation doesn't stop at chatbots. It's making strides in augmented reality (AR) by making its AR platform accessible in some of the world's largest venues. It has partnered with Disguise, a leader in live-event visualization technology, to achieve its lofty AR ambitions.
Integrating a popular chatbot and expanding AR capabilities into live events offers unique ad opportunities that could potentially draw advertisers. These advancements, though promising, might take time to manifest in terms of revenue. The company's sales may be down for now, but with these strategic moves, there's major potential for a future turnaround in my view.
Valuation
The GF Value chart warns Snap could potentially be a value trap, so it's best to think twice about wagering on it now as its price decline has coincided with a declining business.
Takeaway
Snap's social media standing is treading water amidst a myriad of challenges. Faced with increasing competition, disruptions from Apple's privacy changes and a recession-induced slump in ad demand, the company reported a major drop in sales in its first quarter 2023 report. The company is battling these headwinds, focusing on new ad formats and machine learning investments, although results are expected to take time.
Nevertheless, its innovation streak could potentially turn its fortunes around, evidenced by its AR and AI initiatives. These endeavors may not show immediate results, but they indicate Snap's commitment to offering unique user experiences and creating new opportunities for advertisers. However, based on its current positioning, it's tough to feel upbeat about Snap's stock price potential in the upcoming quarters.
