Why an earnings beat couldn’t stop a Snap share price drop

Snap gave investors an unpleasant surprise in Tuesday by forecasting its first-ever revenue decline. Despite an earnings beat in Q4, shares fell in after-hours trading thanks to a revenue miss and the downbeat forecast, with Apple’s privacy policies squeezing the sector.

- Snap’s shares slump in after-hours trading on falling revenue forecast.

- Apple’s privacy policies are limiting the potential of online advertisers.

- Global X Social Media ETF is up 21% year-to-date.

Snap’s [SNAP] share price fell as much as 15% in after-hours trading, after the company posted its earnings for the fourth quarter (Q4) of 2022 on Tuesday. The results were mixed, with a revenue miss and downbeat forecasts concerning investors, notwithstanding an earnings beat.

While Snap did not provide guidance (for the third consecutive quarter), the company warned that revenues could fall up to 10% in the current period. A significant headwind appears to be Apple’s [AAPL] changes to its privacy policies, which have hampered the income of all ad-driven social media platforms.

The results rounded off a disappointing year for Snap, which is responsible for Snapchat. The company’s stock value has dropped 67.7% in the past 12 months, marking a turbulent year for technology stocks across the board as rising inflation and interest rates hammered performance and valuations.

With gains of 29.2% from the start of the year until Tuesday, it had looked as though Snap would fare better in 2023. However, the early indications are that its revenue struggles will undermine much of this early optimism.

Signs of overvalued shares

Snap’s bottom-line results were, on one level, positive. Non-GAAP earnings per share came in at $0.14, 27.3% above the $0.11 consensus estimate reached by analysts polled by Refinitiv. Nonetheless, this figure reflected a 36.4% year-over-year decline.

Other results were more overtly disappointing. Revenue of $1.30bn fell slightly short of the $1.31bn that analysts had expected, rising just 0.1% year-over-year. Elsewhere, net income fell from $22.6m to a loss of $288.5m, while adjusted EBITDA fell 28.6% year-over-year.

The results give Snap $0.17 earnings per share for fiscal year 2022, 13.3% above the $0.15 that analysts had expected. However, taking the 1 February close, it gives the stock a trailing twelve month price-to-earnings (P/E) ratio of 61, compared to 26.41 for the Nasdaq as a whole.

As noted, Snap did not provide detailed guidance. However, its investor letter predicted a year-over-year decline of between 2% to 10% in its upcoming Q1 revenue.

Snap bulls will point to positive subscription data in the results. Daily active users of the social media platform Snapchat increased 17% year-over-year to 375 million, while Snapchat+, Snap’s paid platform, rose to over two million subscribers.

However, it is the company’s rate of growth that will concern most investors. Full-year revenue has grown at an average rate of 41.9% over the last four years, but in 2022 this fell to just below 11.8%. Snap’s investor letter said this reflected “the rapid deceleration in digital advertising growth”. Combined with Snap’s forecast that revenue is likely to fall for the first time in Q1, its relatively high P/E ratio is increasingly hard to justify.

Privacy policies eat into ad earnings

Snap is not the only company struggling as a result of declining ad revenues. The tough economic conditions of 2022 led to many companies restricting their advertising spend, hitting the top line of ad-dependent companies such as Twitter, Meta [META], and Alphabet [GOOGL].

Compounding this effect is Apple’s updated privacy policy, which makes it harder for advertisers to track iOS users across apps and build a targeted ads profile for them. This contributed to a major slump in Meta’s performance over the past year, reflected in the company’s share price being down 52.6% over the past 12 months.

However, Meta released its results after markets closed on Wednesday, and shares for the company rose as high as 20% in after-hours trading. Investors may be wondering whether this indicates that Snap’s woes are confined to the company itself, rather than reflecting a deteriorating trend throughout the ad-driven social media industry.

While an Apple privacy policy launched April 2021 has had a major impact on Snap and Meta’s share price decline, Alphabet shareholders have reason to be even more concerned. Apple is reportedly building an entirely novel online advertising network, which could entirely bypass Google, as part of a “thermonuclear war” between the two companies originally declared by Apple co-founder Steve Jobs in 2009.

Funds in focus: Global X Social Media ETF

Bulls may argue that once the current economic conditions ease, the online advertising market will see a return to its previous growth.

“Advertising demand hasn’t really improved, but it hasn’t gotten significantly worse either,” Snap CEO Evan Spiegel told analysts following the results. Spiegel added that advertisers are “managing their spend very cautiously so they can react quickly to any changes in the environment.”

Investors hoping to capitalise on a potential rebound for Snap can watch the Global X Social Media ETF [SOCL]. As of 31 January, Snap is the fifth-largest holding in SOCL with a 5.72% weighting. Meta is its second largest, with 9.46%, while Alphabet has 4.00%.

SOCL has fallen 24.7% in the past 12 months, but has gained 20.5% in 2023 to date.