Snap stock dives on earnings: Analyst explains why

Shares of Snap Inc. (SNAP) are dropping over 30% in extended hours trading on Tuesday afternoon after the company released its fourth-quarter earnings report. The report showed revenue rose 5% to $1.36 billion, but still missed estimates of $1.38 billion. In addition, Snap posted an adjusted first-quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) which also missed analysts' expectations.

Scott Kessler, Third Bridge Global Sector Lead, TMT (Technology, Media & Telecommunications), joins Yahoo Finance to discuss Snap's performance and what he would like to see from Snap going forward.

When asked about how Snap stands out from competition, Kessler replies: "What I would say about that really is one thing and one thing only and that is historically this company more than any other has focused on brand advertising versus performance advertising. It's one of the reasons why they really had some issues early on post-Covid, if you will, because there was this dramatic shift to direct response advertising essentially associated with e-commerce. That's not how Snap was built."

He continues on to say "It's not how it was operating and they've spent essentially the last year rebuilding the advertising technology and solutions to enable them to more effectively sell that kind of performance, e-commerce advertising. But because of that historic orientation, it's really put them on the defensive and they've spent a lot of time and a lot of money essentially reengineering the platform for those capabilities."

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: Let's dig more into these numbers now. Snap shares, as we've talked about, plunging some 24% right now after fourth quarter earnings. Scott Kessler is joining us now, Third Bridge Global Sector Lead for Technology, Media, and Telecom. So, obviously, a pretty ugly reaction here. What do you think is the biggest source of disappointment here, Scott?

SCOTT KESSLER: Well, a couple of things. Obviously, you mentioned the EBITDA guidance. I'd be curious to what extent the layoffs that you just touched upon are incorporated in that guidance or if somehow, those considerations were excluded. But nonetheless, I think that's a number that people don't necessarily want to see. In addition, if Snap is kind of in the midst of a recovery and rebound, you want to see more revenue growth acceleration. And the fact that they'll likely it seems get to double digit revenue growth while encouraging perhaps isn't quite as much as some people were looking for.

JOSH LIPTON: And, Scott, when you look across the digital ad market and you think about Snap, what makes Snap different? What kind of separates it, do you think, from its peers?

SCOTT KESSLER: Yeah. So, Josh, what I would say about that really is one thing and one thing only. And that is, historically, this company, more than any other, has focused on brand advertising versus performance advertising. It's one of the reasons why they really had some issues early on post-COVID, if you will, because there was this dramatic shift to direct response advertising essentially associated with e-commerce.

That's not how Snap was built. It's not how it was operating. And they've spent essentially the last year rebuilding the advertising technology and solutions to enable them to more effectively sell that kind of performance e-commerce advertising. But because of that historical orientation, it's really put them on the defensive. And they've spent a lot of time and a lot of money essentially re-engineering the platform for those capabilities.

JULIE HYMAN: I mean, it's interesting, Scott, because you do see growth in subscribers still or users, right? Daily active users at 414 million last quarter, is still up 10% year-over-year, which is not terrible, right? So is it just that they really need to wring more revenue from those subscribers without spending so much?

SCOTT KESSLER: Yeah. Look, I would say not terrible is probably not a ringing endorsement. I mean, this is a company that, you know, not a lot long ago was, you know, really doing a great job when it came to all different aspects of growth. And I would say, at the top of the list, was user growth.

Look, I mean, barely in the double digits, when you look, for example, at a Meta, I mean, Meta is growing their user counts almost as strongly as Snap. Snap is a fraction of the size of Meta across a number of dimensions. And unfortunately, that's kind of the way that people are thinking about Snap is kind of, you know, really have this very large user base in the hundreds of millions. And by the way, those are daily active users, not to be confused with a lot of other companies that are providing similar numbers in terms of monthly active users.

But the biggest single issue, I think, with Snap has been how do they go about monetizing those users. They've had challenges. Like I said, they're re-architecting the way they think about advertising. That's taken some time. I think some people have seen Snapchat Plus as kind of a silver lining, where they indicated just in December that they had 7 million paying users.

Those are some positives. But at the end of the day, it's, you know, is this company generating revenue and EBITDA and free cash flow based on those user counts and growth rates?