Snap’s recent stint as a stock market darling appears to be coming to an end, as the Snapchat owner's shares continue to plummet. Wall Street has weighed in on the company's weak guidance, which has dashed the hopes of investors expecting a trajectory similar to Meta Platforms. However, there is still optimism that Snap could benefit from a recovery in advertising, alongside its peer Pinterest.
On Tuesday, Snap forecasted an adjusted Ebitda loss between $55 million and $95 million for the March quarter. This range is significantly wider than the Street consensus of a $21 million loss. As a result, Snap stock experienced a sharp decline of 31% to $11.99 in early Wednesday trading, while Pinterest shares fell by 1.3%.
This decline erases the majority of the gains that Snap had made since November. The upward trend was driven by expectations of improvement in the advertising market, particularly with the company overcoming the obstacles posed by Apple's limitations on targeted ads for mobile devices.
In a research note, Wells Fargo analyst Ken Gawrelski admitted that they were mistaken in their assessment of the pace of improvement in Snap's ads business. Gawrelski now predicts that Snap's advertising revenue will grow by 14% this year, compared to their previous estimate of 19%. Additionally, the analyst noted that Snap seems to be making slower progress in direct-response advertising, which focuses on generating purchases rather than just promoting a brand, compared to larger peers like Meta.
In light of these factors, Gawrelski has lowered his target price on Snap to $16 from the previous $22. Nevertheless, he maintains an Overweight rating on the stock, indicating some degree of confidence in its potential.
Snap's Positive Performance Encourages Investors
Snap, the parent company of popular social media platform Snapchat, has shown promising growth in its key metrics. The company reported a 10% increase in daily active users during the fourth quarter compared to the previous year. Additionally, there was a noteworthy 20% rise in the number of small and medium-sized advertisers. Users also spent double the amount of time engaging with Spotlight video content.
Raymond James analyst Josh Beck remains optimistic about Snap's potential for improvement in advertising, particularly driven by artificial intelligence. Consequently, he has maintained an Outperform rating on the stock. However, he did revise his target price for Snap shares from $20 to $15.
The announcement that Snap would be downsizing its workforce by an additional 10% (following a prior 20% reduction in 2022) has created a divide among Wall Street analysts. Bulls see this move as an opportunity for the company to reduce operating expenses. Conversely, Benchmark Research analyst Mark Zgutowicz questions whether this decision will further hinder Snap's competitiveness in research and development and marketing when compared to larger competitors. He has maintained a Hold rating on Snap stock without setting a target price.
Now, investors' attention is turning towards Pinterest as it prepares to release its earnings report after the market closes on Thursday.
KeyBanc analyst Justin Patterson predicts a 14% growth in revenue for Pinterest's December quarter compared to the previous year. Looking ahead, Patterson anticipates Pinterest's revenue to reach $3.66 billion in 2024, up from $3.08 billion in 2023.
According to a FactSet poll of analysts, the consensus projections for Pinterest's December quarter earnings are 51 cents per share, with revenue expected to be $991 million.
It's worth noting that Pinterest was one of last year's stock picks due to its trading price of approximately $27. As of early Wednesday, the stock's value had risen to $40.63.