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Snap plunges, and here comes the online social media advertising business

Investors knew the world wasn’t clicking for online advertisers right now. In the blink of an eye on Monday evening, they understood how dire the situation could be.

Nearly every major player in the industry reported a noticeable slowdown in ad revenue growth during the recent Q1 earnings season. All but one also missed Wall Street’s targets for this category. Then, in a surprise announcement, Snap Inc.,

INSTANTANEOUS -41.81%

Snapchat’s parent company, said in a filing Monday afternoon that second-quarter adjusted pretax revenue and profit would be below the range the company forecast just a month ago.

Snap’s online advertising business is only a fraction of the size of Google, Facebook or even Amazonit is

AMZN -4.22%

. Still, it was a worrying note just halfway through the second quarter from a company that had never issued a revenue warning before. In a presentation at an investment conference that precipitated the filing, Snap Chief Executive Evan Spiegel said the “macroeconomic environment has definitely deteriorated further and faster than expected.” He also noted that the company would take steps such as “changing some of the pace of our hiring.” In an email to employees the same day, shared by sources, Mr Spiegel added that company officials “have been asked to review spending to find additional savings”.

Snap shares were down 41% as of midday Tuesday following Monday’s disclosures. Facebook’s parent platforms, Meta Platforms, fell 9% on the news on Tuesday, while shares of Pinterest fell 22%. Shares of Alphabet GOOG, parent company of Google -6.34%

and Twitter took smaller hits. Even Amazon, which only recently began disclosing the size of an online advertising company that now generates nearly $33 billion in annual revenue, saw its shares plummet 4% following Snap’s warning. .

How bad is it there? One of Mr. Spiegel’s only reassuring revelations is that revenue continues to grow year over year. Given that the second quarter forecast called for 20-25% growth, that leaves a lot of downside. Since becoming a public company, Snap’s slowest quarter of growth ever was 17%, seen at the start of the Covid-19 pandemic in 2020. The lack of specific new guidance indicates that things could now be much worse than that – or less than they have the potential to be.

It’s impossible to know for sure what Snap’s woes mean for others in the advertising industry. Mr. Spiegel’s email to employees only highlighted macro and industry factors that should, in theory, affect them too. “Like many companies,” he wrote, “we continue to deal with rising inflation and interest rates, supply chain shortages and labor disruptions, changing platform politics, the impact of the war in Ukraine, and more”. None of these factors are specific to Snap.

In a note late Monday, Evercore ISI analyst Mark Mahaney said the macro factors Snap cited should be relevant to any company with an advertising platform, although he said the Snap’s significant exposure to Europe (about 15% of its ad revenue) and brand ads (about 40-45% of its revenue) would be particularly negative for Meta, given Facebook’s significant European exposure, and for Twitter, since the majority of its ad revenue comes from branded ads. Unlike direct response ads, which are intended to elicit an immediate click or conversion, branded ads are intended to increase passive brand awareness and are therefore often more cyclical in nature. He also noted that Google’s ad revenue mix is ​​similar to Facebook’s, favoring direct-response ads over brand.

None of the other social media platforms appear to be presenting at the same investor conference, although Bill Ready, who heads up Google’s business operations, will give a keynote Wednesday morning. Google never gives revenue forecasts, anyway. But if other online advertising companies start issuing similar warnings, things could get even uglier.

Write to Dan Gallagher at [email protected] and Laura Forman at [email protected]

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