MARINA DEL REY, CALIF. — “Traditional media” has it so much tougher than those digital darlings … right?
Snap Inc., the parent of the popular Snapchat app, reported on Wednesday what Pivotal Research Group Senior Research Analyst for Advertising Brian Wieser politely called “soft” Q1 2018 results versus expectations.
Revenues were below forecasts, with Wieser keeping his price target at a tepid $9 per share on a year-end 2018 basis. He kept his “Sell” rating. Wall Street noticed.
At the Closing Bell on Wednesday (5/2), Snap shares slid a whopping 22% to $11.03.
That marks a new low for Snap, following its peak of $23.57 a little more than one year ago.
Snap saw very nice Q1 2018 revenue growth of 54%.
There’s just one problem: Wieser expected revenue growth to come in at 57%, and he was conservative. The consensus forecast was for 63% growth.
That said, Wieser continues to argue that “current period growth rates matter less than what current period data and commentary suggests about longer-term trends, which was negative versus our prior expectations.”
Snap management indicated that it expects its revenue growth rate to “decelerate substantially” in Q2. On the other hand, Wieser said, management also indicated that it expects infrastructure costs to increase “modestly,” for revenue share expenses to moderate because of the absence of Olympics content, and for expenses to more generally rise by low double digits in the first half of 2018, compared to the same period in 2017.
“In general, we think the company is more likely than not to balance reduced revenue outcomes with offsetting cost controls,” Wieser said.
Snap has some key problems:
- The company’s user base is stabilizing rather than growing, with a decline observed in March … although time spent remains high at 30 minutes per day on average
- Ad revenue growth was 62% in the quarter, and supported at least partially by the Olympics, which accounted for “less than 10% of total revenues for the quarter.”
- The transition to programmatic advertising has been associated with a fall in pricing, although Wieser is skeptical that advertiser budgets have necessarily fallen because of lower pricing given our past observations around how advertisers who buy from Snap tend to budget. “However,” he said, “we do agree that it has likely broadened the base of advertisers able to buy from Snap.”
- Among the company’s ad products, Snap Ads were up 102% in the quarter, but the other ad products including Sponsored Creative Products (Lens and Filter products) saw average order values down. “This reinforces anecdotal observations we have heard from the industry as well as other management comments indicating smaller campaign-level commitments are going to Snap with smaller advertisers with less meaningful budgets driving the revenue growth,” Wieser says. Although management noted that transitioning these products to programmatic / audience-based buys had a negative effect, slower revenue growth is likely due to more significant reductions in growth from larger advertisers who are collectively allocating diminished budgets to Snap.
Looking at new products, ads developed for use in Augmented Reality and capabilities supporting buying from small and medium-sized advertisers via self-service tools are likely helpful, although Wieser believes that deceleration should generally continue going forward.