The share price of Snap Inc, the company behind Snapchat, Spectacles, and Bitmoji, plummeted over 40 percent on Tuesday, 24 May, erasing nearly half its market value and dragging other social media and technology stocks with it.
In a regulatory filing late on Monday, the company said that "the macroeconomic environment has deteriorated further and faster" than it anticipated in its earnings guidance on 21 April.
Guidance is an informal report that a publicly listed company sends its shareholders about how much it expects to earn in the upcoming fiscal quarter or year.
In the filing, Snap said that it expected revenues and adjusted earnings to fall “below the low end” of its guidance range in the second quarter of 2022, ending June.
After the news broke, it set off a ripple effect. Facebook-parent Meta Platforms, Google-parent Alphabet, and Twitter fell over five percent each, while Pinterest tanked over 20 percent.
Why Did Snap Fall?
An internal memo written by Snap CEO Evan Spiegel sheds some light on what exactly caused the company to revise its estimates.
Spiegel, according to Financial Times, said that some of the challenges that the company is facing are:
Rising inflation and interest rates
Supply chain shortages
Platform policy changes
The impact of the war in Ukraine
Snap, which generates most of its revenue through advertising, had indicated that after Russia’s invasion of Ukraine in February, many advertisers had temporarily paused their campaigns.
The company had also stopped advertising in Russia, Ukraine, and Belarus, and put a blanket ban on advertisements by any entities owned by the Russian government.
Last April's iOS privacy change also continues to affect the company negatively. Apple altered its iPhone software to require apps to ask users whether they want to be tracked, seriously limiting Snap's ability to gather data used for targeted ads.
Spiegel reportedly insisted that the fundamentals of the business remain strong and indicated that the company will slow down hiring to weather the storm.
Yet Another Blow to the Tech Sector
Snap's plummet comes as yet another blow to the technology sector in the United States, which saw a major boom over the past two years.
To put the growth into perspective: 2020 marked the first time when Google, Meta, and Amazon earned more than half of the total ad revenue generated in the US.
People were forced indoors due to the COVID-19 pandemic and ad revenues rose sharply on the back of increased use of social media and streaming platforms. However, the pandemic has waned and revenue is drying up.
When Meta's fourth quarter earnings were announced in February, its shares plunged about 26 percent, erasing $250 billion or over a quarter of the company's market value.
Similarly, between 19 and 20 April, Netflix lost nearly 40 percent of its market value, amounting to almost $60 billion, in reaction to the fact that it had lost subscribers for the first time in a decade.
Meanwhile, YouTube's advertising sales fell short of expectations by over $600 million and Amazon saw a net loss of nearly $4 billion. Several tech companies have either slowed down hiring or laid people off this year.
The Russia-Ukraine war is a major factor behind the increased inflation and economic slowdown.
The invasion was countered by the West with a series of economic sanctions, causing companies (including Amazon, Meta, and Google) to suspend sales and services in Russia.
The supply chain issues caused by the conflict increased the prices of various products and commodities, including oil, leading to less expenditure on advertising.
(With inputs from Financial Times and Tech Crunch)