Last night, after an earnings report showing a miss on the top and bottom line, shares in Snap (SNAP) got hammered. They initially lost just over 25%, and the bleeding continued this morning to where, as I write, they are down 33.5%. And that is despite the fact that they actually grew users and announced a share buyback scheme. Twitter (TWTR) also reported bad results. In fact, at first glance theirs seem worse, without the redeeming factors of a beat on users and a $500 million buyback, yet that stock has fared better, losing only 2% in the premarket.
So why is that? And what do the differing reactions tell us about the prospects for earnings from the other big two online advertising dependent companies, Meta Platforms (META) and Alphabet (GOOG, GOOGL)?
The differing reactions seem to be primarily driven by the market’s perceptions of each company’s future prospects. Twitter is believed to still be relevant, whereas there is a feeling that Snapchat is in a decline that will be very hard to reverse. My personal experience suggests that the second part of that is true. I have two college age kids, and another in his late twenties. All three have been avid Snapchat users for years but have recently lost their enthusiasm for that platform to some extent and seem to be more focused on Instagram and/or TikTok.
As I frequently point out, the plural of anecdote is not data, but if they have made that switch, it is probably because their friends have, and the friends of their friends, and their friends etc. So, in this case, even anecdotal evidence has some worth. Twitter, on the other hand, is more than just the plaything of a notoriously fickle demographic. They are a big part of the news and media structure of not just America, but the world.
There is also an element of the nature of the excuses offered by both companies. The investor letter that accompanied Snap’s release was a pretty depressing mea culpa. Yes, they blamed economic uncertainty and customers cutting back on spending, but there was also a clear admission that they could have done better. Why else would they cut the two founders’ salaries to $1, leaving them dependent on getting the stock to what looks like an unattainable $40 if they are going to get paid?
Twitter, on the other hand, has a very well-known and legitimate excuse for a poor quarter: the Elon Musk saga. That may or may not have deterred advertisers as the company claimed, but it would certainly have been both a distraction and an escalating cost in legal fees as the quarter wore on. The limited reaction in Twitter shares so far suggests that traders and investors believe TWTR’s setback is temporary and addressable, while Snap’s problems are existential.
If that is true, then the implications for Meta and Alphabet are not good, but not that bad either. The discrepancy indicates that the misses, without the exceptional circumstances, weren’t that worrying. Twitter lost only a couple of percentage points despite a poor report, which suggests that traders believe that the weakness is largely down to the unique situation of this quarter. SNAP, on the other hand, collapsed, again suggesting that their problems were unique, but not in a good way. The net would be that things in the online advertising world are a bit worse than expected, but not at the point where company-specific circumstances are irrelevant.
All of that hints at a trading strategy for META and GOOGL. Because online advertisers do really seem to be cutting back more than anticipated, and there is an air of negativity in the space after two misses, I won’t be rushing to buy either stock in front of next week’s earnings. Once those earnings hit, however, I will be watching closely. If the headline numbers miss expectations, then there will be an opportunity to buy both stocks as a short-term trade in anticipation of a retracement and as a long-term play based on where these companies will be when the economic outlook improves. Unlike Snap, neither Meta nor Alphabet are facing down an existential crisis and their stocks have a better chance of rebounding when these market conditions turn bullish.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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