Snap Warns of Disappointing Q2

In an 8-K filing on May 23, Snap SNAP said it had lowered its second-quarter revenue and adjusted EBITDA forecast, mainly citing the Ukraine war and macro headwinds. While its peers may also feel pressure on revenue growth, we think the effect on Meta and Google’s YouTube is likely less as they remain the top platforms for direct-response advertising, which we expect will be affected less than brand advertising. Twitter’s revenue growth will likely be pressured as the platform continues to attract more broad-based brand campaigns. We do not expect spending on contextual advertising, which IAC’s properties attract, to be affected as much. In addition, during economic slowdowns advertisers prioritize purchasing ad inventory from the likes of Meta’s Facebook and Instagram, TikTok, and YouTube over others in the space, including Snap and Pinterest. After adjusting our models, we have lowered our Snap fair value estimate to $49 per share from $63 and our Pinterest fair value estimate to $48 per share from $56. We are maintaining our fair value estimates of $3,600 for Alphabet, $384 for Meta, $160 for IAC, and $54.20 for Twitter. During a May 23 event, Snap CEO Evan Spiegel said the firm now expects second-quarter year-over-year growth below the 20%-25% guidance provided when the firm released first-quarter results in late April. The firm also expects adjusted EBITDA below the $0-$50 million range. Given the macro headwinds, we think it is likely that ad spending has been cut mainly on branding or broad-based advertising, while direct response has not been affected as much. We saw a preview of that in Snap’s first-quarter results as direct-response ad revenue increased 43% while broad-based ad revenue was up only 26%. On the user count and engagement front, our takeaway from Spiegel’s statements was that Snap’s platform continues to attract users; the issue remains monetization of those users on weaker demand from advertisers and their agencies.