Snap Inc., the parent company of Snapchat, experienced a significant drop in its stock price, plummeting over 30% in late trading. This decline came after the company reported disappointing revenue for the holiday quarter, indicating that it is still grappling with challenges in its digital advertising business.
In the fourth quarter, Snap’s revenue increased by 5% to $1.36 billion, falling short of analysts’ average projection of $1.38 billion. The company’s full-year sales growth remained flat, which it attributed to a “challenging operating environment.” CEO Evan Spiegel has been leading a comprehensive restructuring effort over the past two years, which involved job cuts and the termination of projects that did not contribute to revenue or user growth. Despite these efforts, Snap is still heavily reliant on social media advertising, an area where it struggles to compete with industry giants like Meta Platforms Inc., the owner of Instagram and Facebook.
Jasmine Enberg, a principal analyst at Insider Intelligence, noted that Snap is considered a smaller and less essential player for advertisers compared to Meta. The company has faced difficulties in building a robust ad business and has not been able to keep pace with the major tech titans. Both Snap and Meta were adversely affected by changes to Apple Inc.’s privacy settings in 2021, which made it more challenging for advertisers to track iPhone users. While Meta managed to bounce back with a 25% increase in sales in the fourth quarter, Snap is still in the process of recovering.
To address these challenges, Snap has undertaken significant changes to its core business. It has focused on improving ad targeting and measurement effectiveness while expanding its direct-response advertising offerings. In its letter to shareholders, the company expressed encouragement regarding the progress made with its ad platform and highlighted improved results for some advertising partners. However, Snap acknowledged that the conflict in the Middle East had a negative impact on its growth in the fourth quarter.
Snap has also explored new revenue streams, with varying degrees of success. Its subscription offering, Snapchat+, has already garnered 7 million paying users and generates an annualized revenue run rate of $249 million. This achievement sets Snap apart from other social media companies that have struggled to convert users into paying subscribers. However, the company’s attempt to develop augmented reality offerings for retailers proved too complex and was ultimately discontinued last year.
Snapchat currently boasts 414 million daily active users, representing a 10% increase from the same period last year. Nearly half of these users are located in established markets such as North America and Europe, which the company now plans to prioritize. This shift in focus signifies a notable change for Snap, which previously dedicated resources to supporting Android phones in emerging markets.
CEO Evan Spiegel emphasized the importance of user growth and deepening engagement in highly monetizable geographies. By prioritizing these initiatives, Snap aims to increase daily active usage of Snapchat, enhance content engagement, improve performance for advertisers, and ultimately drive revenue growth and increased free cash flow.
Looking ahead, Snap projects revenue of $1.10 billion to $1.14 billion for the first quarter, representing a potential 15% year-over-year increase. This growth rate aligns with analysts’ average estimates. In the fourth quarter, Snap reported a net loss of $248.7 million, lower than the $287.6 million loss recorded in the same period the previous year. Earnings per share were 8 cents, surpassing analyst estimates of 6 cents.
The company anticipates incurring costs of $55 million to $75 million related to layoffs, with the majority of expenses expected to be incurred in the first quarter.
Despite the challenges faced by Snap, the company continues to attract a substantial user base, with over 800 million people using the app globally every month. As it navigates the evolving landscape of digital advertising, Snap remains focused on driving growth, improving user engagement, and delivering value to its advertisers.