Is Snap the Canary in Digital Advertising’s Coal Mine?

Downbeat Forecast

After lowering its guidance for quarterly sales and adjusted earnings earlier this week, Snap posted its worst day ever yesterday. The Snapchat parent explained the adjusted outlook reflects a macroeconomic environment that “has deteriorated further and faster than anticipated.”

The news seemed to have an impact on some of Snap’s peers that also rely heavily on advertising revenue, including fellow social media giants Meta Platforms (FB), Pinterest (PINS), and Twitter (TWTR). Google parent Alphabet (GOOGL) and streaming platform Roku also saw their share prices slip.

Ad Tech

Analysts note that while Snap’s adjusted forecast suggests trouble for the social media sector, the ad tech industry is similarly exposed. This involves companies who maintain a marketplace for the buying and selling of digital advertising. Included are firms such as Magnite, PubMatic, and the Trade Desk. Each stock’s share price fell more than 10% during yesterday’s trading.

Analysts argue this is all rooted in the cyclical nature of advertising. If consumers are perceived to be cutting back on their spending, companies are less likely to spend money marketing their products. Inflation, the Fed rising rates in response, and the war in Ukraine are all putting pressure on spending, and upending the market for digital ad space.

Snap Specifics

Evercore ISI analyst Mark Mahaney addressed Snap’s adjusted forecast in a note released this week, saying it’s relevant to any company with an ad platform. He argued Snap is noteworthy in two specific ways relative to the sector as a whole. One is its exposure to Europe, from where around 15% of its ad revenue is generated. The ongoing war in Ukraine makes this potentially problematic.

Also, Mahaney notes Snap tends to have more brand ads than direct-response ads. Industry experts note brand ads are more cyclical because they focus on brand awareness rather than direct call to action. As consumer spending and advertising trends change, investors may start asking who is most similar to Snap.

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