- Both social media stocks could face a protracted struggle with the changing digital advertising market
- Snap has cash to ride out the storm, but if the economy deteriorates, it looks hard for the company to bounce back quickly.
- Pinterest is in the same boat, its stock drops 50%
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It is difficult to make a buy call when the markets are going through a massive blind sell off. In the current economic environment, with the risks of recession looming, investors are abandoning high-growth technology stocks, fearing that these companies will not be able to meet their earnings targets.
One of the segments hardest hit by this current stock rout is the stocks of social media players who rely on ad spend to boost their sales and investment appeal. In this group, we shortlisted Snap (NYSE:) and Pinterest (NYSE:) for further scrutiny to analyze their current earnings momentum and the possible dangers associated with their small size.
Here’s a more in-depth look:
Snap: coping with the slowdown in advertising spending
Photo-sharing app operator Snapchat has been one of the most successful turnaround stories during the pandemic. The growing number of users propelled sales as businesses of all sizes turned to social media platforms to reach customers who were stuck at home.
CEO Evan Spiegel and his team channeled this traffic boom to increase the app’s appeal to advertisers. The Snapchat app attracted 332 million daily active users by the end of . Sales during the period increased 38% to $1.06 billion.
But California-based Snap is unlikely to sustain that kind of growth if recession hits the global economy. The first warning came from the company itself when it told investors last month that it would not be able to meet its earnings forecast due to advertisers cutting advertising budgets.
Since the May 23 announcement, the stock has lost more than 40%, wiping out nearly $16 billion in market value and wiping out all gains made over the past five years.
The stock closed Monday at $12.02, after falling about 9.5% in the day. It is down nearly 86% from its 52-week high of 83.34 hit in mid-September.
Although Snap has cash to weather the storm, given the current macroeconomic situation, it looks like it will be difficult for the company to bounce back.
With the current unfavorable macro environment making it seem likely that advertisers could cut their digital ad spend, Snap also faces an existential threat from TikTok, which has 2.91 billion monthly active users.
TikTok, owned by Chinese company ByteDance Ltd, is the most downloaded app in the world. As of 2020, Americans spent more time on TikTok than on Facebook or Instagram. This year, the Chinese app is expected to overtake YouTube.
Pinterest: 50% reduction
Among the smaller social media players, San Francisco-based Pinterest has also been hit hard by the current market rout, although it has exceeded expectations. PINS stock, however, which closed Monday at $17.22, is down more than 50% for the year.
The company operates a digital message board containing images and ideas for furniture, fashion, weddings, recipes, etc., allowing users to scroll through a feed of “pins” containing images or videos. Users can then save the pins to customizable boards to organize ideas for everything from vacation plans to dinner recipes or vacation shopping lists.
Pinterest management believes that its appeal to advertisers is very different from that of other social media companies because users come to PINS with the intention of making a purchase. This makes advertising an integral part of the Pinterest user experience, rather than something negative.
Piper Sandler analysts said in a recent note that the two social media stocks could face a protracted struggle with the changing digital advertising market, adding that ad-dependent stocks are not good candidates. rebound for investors. The note adds:
“After a strong two-year run, digital ad spend appears to be normalizing. Group multiples have declined and are around 40% of recent highs, but history suggests multiples may not be reassessed until the ad spend growth is bottoming out.”
Piper Sandler cut her price target for Snap to $18 per share from $30. For Pinterest, Piper Sandler cut her price target to $23 per share from $35.
Conclusion
Even with their stock prices dropping drastically, it’s hard to call a bottom for these two small social media players. In a possible recession scenario, their big competitors, like Alphabet (NASDAQ:) and Meta Platforms (NASDAQ:) are better positioned to weather an economic downturn.
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