In the cutthroat arena of the social media wars, momentum is everything. Therefore, youth-centric digital networking platform Snap (NYSE:SNAP) didn’t do itself any favors with its latest poor earnings performance. While the headlines focused on the disappointing numbers, the real vulnerability is that the underlying app could become the odd man out. I am bearish on SNAP stock.
SNAP Stock Crumbles on Disappointing Results
As TipRanks contributor Steve Anderson mentioned, SNAP stock fell following the underlying company’s disclosure of its Q1-2023 earnings results. To be fair, earnings per share came in at 1 cent, beating analysts’ consensus estimate of a loss of a penny. However, on the top line, Snap’s revenue reached only $989 million. Unfortunately, this tally missed the consensus target of $1.01 billion.
Additionally, Anderson pointed out some other discouraging data points, stating that “Snap’s reported global Daily Active Users (DAUs) figure came in at 383 million. That’s just under analyst projections calling for 384 million. Further, Snap also faltered in its average revenue per user (ARPU) figures, coming in at $2.58 against analyst projections of $2.63.”
Interestingly, Anderson stated that management didn’t disclose official guidance for Q2. However, the “internal forecast” that Snap did produce also disappointed against analyst projections. “Snap looks for second-quarter revenue of $1.04 billion, but analysts expected $1.1 billion,” wrote Anderson.
Last Friday, SNAP stock fell by slightly over 17%. Sadly, the rush for the exits means that currently, shares sit at 1.4% below parity for the year. Prior to the earnings disclosure, SNAP was up nearly 19% for 2023.
Digital Advertising Woes and Fading Relevance Hurt Snap
Fundamentally, SNAP stock faces a two-pronged headwind– digital advertising woes and fading relevance. Put another way, the social network must address an immediate threat, one that vexes similar enterprises. Should it overcome that problem, it then faces the “end boss” of a cruelly difficult video game.
Prior to Snap’s Q1 earnings, TipRanks reporter Radhika Saraogi mentioned that Snap’s business “may experience its fifth consecutive quarter of losses due to weakness in the advertising market brought on by the general slowdown in the economy and fierce competition from platforms like TikTok.”
Of course, the earnings miss didn’t happen, but Saraogi’s other warnings remain right on track. Frankly, internet-driven businesses that thrive on viewership and engagement stats live or die by digital ads. When the advertisers don’t show up, the enterprise will almost surely fail, irrespective of its fundamental value.
Just look at BuzzFeed (NASDAQ:BZFD) and its layoffs announcement. Amid the pink slip disclosure was the disclosure that the company will completely eliminate its journalistic arm BuzzFeed News. Despite winning a Pulitzer Prize, the money wasn’t simply there for BuzzFeed News. Sadly, the company had to let it go.
Regarding relevance, this factor may be the most worrying for SNAP stock. According to data from Insider Intelligence, while Snap’s Snapchat platform will likely remain Generation Z’s social network of choice through 2023, TikTok will narrowly overtake it in user count next year.
Distressingly for SNAP stock, analyst project that the aforementioned gap will widen in 2025, and that’s also the year that Instagram will surpass Snapchat’s user count.
More Problems May Be on the Way
What should worry stakeholders of SNAP stock is that the social media firm must get its act together soon. Otherwise, another similar disappointment in Q2 would likely cause more people to rush for the exits.
According to data from TipRanks, in Q1 of last year, Snap posted $1.06 billion in sales. This means that even if the company hit the Q1-2023 consensus revenue target, the result would be down almost 5% year-over-year. Should Snap hit analysts’ Q2 sales target, the result would be down roughly 1% year-over-year.
If it only reaches its internal projection of $1.04 billion, the company will be hit with a 6.3% year-over-year loss. Again, Snap must get its act together – and right quick.
Is SNAP Stock a Buy, According to Analysts?
Turning to Wall Street, SNAP stock has a Hold consensus rating based on five Buys, 18 Holds, and one Sell rating. The average SNAP stock price target is $10.25, implying 17.4% upside potential.
On TipRanks, SNAP stock has a 1 out of 10 Smart Score rating. This indicates strong potential for the stock to underperform the broader market.
The Takeaway: SNAP Stock Probably Faces Overwhelming Odds
While it’s always possible that an army of meme-stock traders could rally behind SNAP stock, the underlying enterprise faces overwhelming odds. Much of the disappointing revenue performance stems from a familiar headwind — declining digital ad sales. However, Snap also struggles with fading relevance. That could be the kiss of death.
