Shares of Snap are off just over 20% this morning, a huge cut to the valuation of the social networking company.
In one sense, the post-earnings drop is an indictment of the company’s business. On the other, Snap’s stock has merely retreated to midyear levels and remains far above the historical price range it found itself mired in during its more unprofitable days.
But Snap’s earnings report and its ensuing selloff have not held their impact to just the company’s own value. Other social companies have also taken hits: Facebook shares are off nearly 5% this morning, while Twitter is off around 3%. It’s an arse day for social media companies that are public — and for their private-market brethren, even if we can’t see their prices change as granularly.
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Let’s answer the why before we get into what the situation may mean for social companies more generally. We’ll focus on Facebook at that point, considering its metaverse and impending name change.
Why Snap is down: Supply chains and Apple’s power
Snap posted $1.07 billion in revenue in its most recent quarter, lower than market expectations of $1.10 billion, per CNBC reporting. That revenue result was up 57% year over year, and Snap narrowed its net loss to just under $72 million in the quarter, down from just under $200 million in the year-ago quarter.
Even better, Snap posted massively improved cash flow results in the period when compared to its year-ago results. Growth? Check. Improving profitability? Check. Ability to self-fund? Check. And yet its stock fell sharply. Why? Guidance.
Looking ahead, Snap said that it expects revenues for Q4 2021 “to be between $1.165 million and $1.205 million.” The market, in contrast, expected the company to generate $1.36 billion in the current quarter. The lowest analyst estimate for Q4 2021 Snap revenue that Yahoo Finance has on file was $1.20 billion. The company may miss even that guess.
Companies that are valued more on growth than GAAP profitability tend to swing sharply when growth slows. And Snap is forecasting an almighty revenue growth deceleration. That explains the selloff. But what explains the company’s slowing revenue growth?
Per the company’s earnings call, Apple was a component:
Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July. While we anticipated some degree of business disruption, the new Apple provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.
As were macroeconomic issues relating to supply-chain delays:
This impact was compounded by the ongoing macroeconomic effects of the global pandemic, with our advertising partners facing a variety of supply chain interruptions and labor shortages. This in turn reduces their short-term appetite to generate additional customer demand through advertising at a time when their businesses are already supply-constrained.
More specifically, Snap said that Apple’s SKAdNetwork (SKAN), which was built to “allow app-based advertisers to continue measuring their advertising on iOS” after the company shook up the operating system’s privacy controls, has generated results that “diverge meaningfully from the results we observed on other first and third-party measurement solutions, making SKAN unreliable as a standalone measurement solution.” That’s bad.
On the supply-chain point, the company expanded later in the same call, saying that it has “heard from advertising partners across a wide variety of industries and geographies that they are facing headwinds in their business related to disruptions in global supply chains as well as labor shortages and increasing costs. In turn, we expect this to impact advertising demand in Q4 in particular as, in many cases, their businesses do not have the inventory or operational capacity to support incremental demand.”
A double-whammy for growth, then.
Investors appear to anticipate that Snap’s issues with Apple and the global supply crisis limiting advertiser demand will impact other social companies. Hence why Facebook and Twitter are also down in trading today.
Which, I think, fits neatly into the logic behind Facebook’s move toward a metaverse focus.
Enter the metaverse
I could never really figure out why Facebook spent heavily on VR when the market for virtual reality was still figuring its shit out. It felt extraneous, to a degree, when stacked next to the company’s product mix at the time.
But contrary to my pessimism, the move may have actually been pretty brilliant from a strategic perspective. Here’s the argument:
- If Facebook has known for some time that its core applications were seeing usage declines in certain markets and certain demographics (it did),
- Then it may have started laying long-term bets for future products that could help the company turn the page on its first generation of services toward something else,
- And as that thing is, apparently, the metaverse, historical VR spend makes sense.
The above fits into the Snap revenue issues as the smaller company’s problems are an indication that the social media market may be losing some of its revenue luster; Facebook may face similar issues, which would merely underscore the sorts of cracks it may have seen coming to its core social networking business model.
So, something else will have to fill the void, and Facebook appears to planned to shove VR into that particular gap. The company’s rebrand fits neatly into that sort of push.
A lot of the above is speculative weaving, but I do think that the Snap report makes Facebook’s metaverse push more reasonable, provided, of course, that the effort can lead to sizable, high-margin revenues in the near-ish future.
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