Oh Snap! Social media stocks lose billions after Snapchat parent warning

by | May 27, 2022 | Business, Economy, US

By Nivedita Balu and Medha Singh

(Reuters) – Snap Inc shares plunged more than 40% and sparked a sector-wide selloff on Tuesday after a profit warning from the Snapchat parent signaled tough times ahead for the once-booming digital ad industry.

The company was on track to lose $15 billion in market capitalization, while shares of major online advertisers and social-media firms were set to lose a combine $200 billion in value from the rout.

Snap shares closed at $12.79, lower than their 2017 IPO price of $17.

Meta Platforms, Pinterest, Twitter and Google-parent Alphabet dropped between 5% and 24%.

Snap said on Monday it was expecting to miss quarterly revenue and profit targets set just a month earlier and would have to slow hiring and lower spending.

Valuations for social media stocks are coming back down to earth after the companies posted unprecedented growth last year when advertisers began to recover from the pandemic, said Brian Wieser, global president of business intelligence at ad agency GroupM.

“There’s a resetting of expectations,” he said, adding that while economic problems like inflation are partly hurting revenue, Snap and other platforms have also overestimated their ability to maintain break-neck growth.

Even so, Snap’s valuation of nearly 15 times 2024 estimated earnings before interest, tax, depreciation and amortization, according to Refinitiv data, was significantly higher than Alphabet’s 8.5 times and Meta’s six times.

The bleak view from one of the sector’s well-known names underlines the impact of the Ukraine war, surging inflation and rising interest rates on social media companies just when they were trying to shake off the hit from changes to Apple’s iOS operating system.

“Snap is a proxy for online advertising and when you see weakness there then you automatically think Facebook, Pinterest and Google,” said Dennis Dick, a trader at Bright Trading LLC.

“Once you start thinking about Google, that’s when the markets start to sell off.”

Snap and its peers including Meta are in the path of a storm that also includes increasing competition from TikTok for users’ attention and ad dollars, said Jasmine Enberg, principal analyst at research firm Insider Intelligence.

Tuesday’s selloff comes days after a Bank of America fund managers survey indicated investors are becoming increasingly bearish on tech stocks, a stark reversal to a bullish trend in the past 14 years.

Analysts said Snap’s outlook for core profit suggested expenses will outpace its revenue growth, given headcount was up 52% in the prior quarter.

“There’s a lot to deal with in the macro environment today,” Chief Executive Officer Evan Spiegel said at a tech conference on Monday.

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(Reporting by Medha Singh and Nivedita Balu in Bengaluru and Sheila Dang in Dallas, Additional reporting by Akash Sriram; Editing by Aditya Soni, Anil D’Silva and Bernard Orr)

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