Snap, Pinterest Face Bleak Earnings Outlook As Recession Risks Loom

It’s hard to make a buy call when markets are going through a broad, indiscriminate sell-off. In the current economic environment, with recession risks looming, investors are exiting high-growth tech stocks on concerns these companies won’t be able to meet their earnings targets.

One of the hardest-hit segments in this ongoing equity rout are the stocks of social media players that rely on ad spending to boost their sales and investment appeal. In this group, we have short-listed Snap (NYSE:SNAP) and Pinterest (NYSE:PINS) for additional scrutiny, in order to analyze their current earnings momentum and the possible hazards that come with their small size.

Here's a deeper look:

Snap: Facing Slowing Ad Spend

The operator of photo-sharing app Snapchat was one of the most successful turnaround stories during the pandemic. The surging number of users propelled sales as companies of all sizes turned to social media platforms to reach customers who were stuck at home.

CEO Evan Spiegel and his team channeled this traffic boom into ramping up the app’s appeal to advertisers. The Snapchat app drew 332 million daily active users at the end of the first quarter. Sales during the period increased by 38% to $1.06 billion.

But the California-based Snap is unlikely to sustain that kind of growth if the recession hits the global economy. The first warning came from the company itself when it told investors last month it wouldn’t be able to meet its profit forecasts due to advertisers cutting their ad budgets.

Since the announcement on May 23, the stock has lost more than 40%, erasing almost $16 billion in market value and wiping out all gains made during the last five years.

The stock closed on Monday at $12.02, after falling about 9.5% on the day. It's down almost 86% from its 52-week high of 83.34, reached in mid-September.

Though Snap has cash to ride out the storm, considering the current macroeconomic situation, it looks like it will be tough for the company to bounce back.

With the current adverse macroeconomic environment making it seem likely advertisers could curtail their digital ad spend, Snap is also facing an existential threat from TikTok, which has 2.91 billion monthly active users.

TikTok—owned by China’s ByteDance Ltd—is the most-downloaded app in the world. Beginning in 2020, Americans spent more time on TikTok than they did on Facebook or Instagram. This year, the Chinese app is expected to overtake YouTube.

Pinterest: Down 50%

Among the smaller social media players, the San Francisco-based Pinterest has also been hit hard in the current market rout, though last quarter's earnings beat expectations. PINS stock, however, which closed Monday at $17.22, is down more than 50% for the year.

The company operates a digital bulletin board for pictures and ideas for furniture, fashion, weddings, recipes, and more, allowing users to scroll through a feed of “pins” that contain images or videos. Users can then save the pins to customizable boards to curate ideas for anything from vacation plans to dinner recipes or holiday shopping lists.

Pinterest management believes its appeal to advertisers is very different from that of other social media companies as users come to PINS with the intention of making a purchase. That makes advertising an integral part of the Pinterest user’s experience, rather than something negative.

Analysts at Piper Sandler in a recent note said that both social media stocks could be in for an extended struggle with the digital advertising market in flux, adding that ad-dependent stocks are not great rebound candidates for investors. The note added:

“After a strong two-year stretch, digital ad spend looks to be normalizing. Group multiples have declined and are ~40% off recent highs, but history suggests multiples may not re-rate until after ad spend growth bottoms.”

Piper Sandler cut its price target for Snap to $18 per share from $30. For Pinterest, Piper Sandler cut its price target to $23 per share from $35.

Bottom Line

Even with their share prices down drastically, it’s hard to call a bottom for these two smaller social media players. In a possible recession scenario, their large competitors, like Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) are in a better position to weather an economic downturn.

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