Snap: Able to Navigate Near-Term Challenges?

Global supply chain issues even seem to be hampering social media companies as evident from Snap’s (SNAP) Q3 results. Snap delivered a mixed bag of earnings that resulted in the stock falling 22% in an extended trading session on October 21.

The company posted revenues of $1.07 billion, a jump of 57% year-over-year, but missed the consensus estimate of $1.1 billion. SNAP’s adjusted earnings came in at $0.17 per share, surpassing analysts’ estimates of $0.08 per share. Moreover, Snap’s daily active users (DAU) increased 23% year-over-year to 306 million.

However, Snap CEO and co-Founder, Evan Spiegel cautioned, “We’re now operating at the scale necessary to navigate significant headwinds, including changes to the iOS platform that impact the way advertising is targeted, measured, and optimized, as well as global supply chain issues and labor shortages impacting our partners.”

The iOS changes that Spiegel is referring to is Apple’s (AAPL) Identifier For Advertisers (IDFA) that came into effect this year, with the launch of Apple’s iOS 14.5. This development will result in app developers being unable to track a user’s IDFA, if a user opts out of sharing privacy details while downloading an app from AAPL’s app store.

The company’s management elaborated more on the impact of the supply chain challenges faced by its advertising partners on its Q3 earnings call, “This in turn reduces [advertising partners’] short-term appetite to generate additional customer demand through advertising at a time when their businesses are already supply-constrained.”

In Q4, the company has projected revenues to range between $1.17 billion to $1.2 billion, while adjusted EBITDA is anticipated to vary from $135 million to $175 million. (See Analysts’ Top Stocks on TipRanks)

According to JMP Securities analyst Andrew Boone, SNAP’s revenue guidance for Q4 was “13% below consensus driven by the impact of iOS changes.” However, the analyst believes that these challenges are “temporary” and expects advertisers “to return to the platform as attribution models are recalibrated and new tools are developed.”

Furthermore, Boone pointed out that while SNAP was confident that the iOS changes have not affected the company’s advertising efficiency, “iOS14.5 is limiting direct response advertisers’ ability to measure and optimize campaigns on Snapchat, leading to reduced spend on the platform.”

While the analyst acknowledged that SNAP is developing its own ad measurement tools, Boone also said that the “risk here is how long that takes.”

Boone has a Buy rating and a price target of $82 (43% upside) on the stock.

Interestingly, the analyst expects Facebook (FB) to be the “most impacted by these [Apple’s iOS] changes given it is an app-based, direct-response advertising platform,” while Twitter (TWTR) and Alphabet (GOOGL) to be less impacted “given that the majority of Twitter’s ad spend remains brand while Google has high exposure to web-based search.”

Turning to the rest of the Street, consensus is that SNAP is a Strong Buy, based on 26 Buys, five Holds, and one Sell. The average Snap price target of $79.93 implies 39.4% upside potential to current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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