Slowing ad growth of Snap triggers inflation fears in tech sector

Los Angeles [US], October 21 : Snap Inc's forecast of no revenue growth on Thursday in the typically busy holiday quarter triggered a warning signal in the sector that rising inflation and the war in Ukraine could hurt other tech companies dependent on advertising revenue, Reuters reported.
Shares of Snap Inc dropped 27 per cent in after-hours trading.
The report said Snap, which owns the photo messaging app, is the first of the major tech firms to report quarterly earnings, and the results cast a shadow for other platforms that rely on advertising revenue such as Facebook owner Meta Platforms, Alphabet's Google and Pinterest, which report their results next week.
Snap's poor results follow a similarly disappointing second quarter, in which the company painted a grim picture of the weakening economy's effect on the social media sector, the report said.
Its stock has been down 77 per cent so far this year even before the latest dismal results.
The company's Thursday results took away over $4 billion off Snap's market capitalisation in trading after the bell.
The report also said that shares of other companies that sell digital advertising also dropped, with Meta Platforms down over 4 per cent, Alphabet down 2.7 per cent and Pinterest losing nearly 8 per cent. All together the sell-off in late trading erased over $40 billion in stock market value from internet ad companies.
"We expect that the operating environment will continue to be challenging in the months ahead," the company said.
According to Reuters, the company said its internal forecast estimates that revenue for the fourth quarter, which includes the holiday season when advertisers ramp up activity, will be flat from the previous year. The ability to forecast future quarters remains challenging, Snap said.
The expectation of no growth in the fourth quarter was also a shock to investors, the report said.
According to the report, Wall Street had forecast 7 per cent growth, said Brad Erickson, an analyst at RBC Capital Markets, in a note after the results.
Revenue for the third quarter ended September 30 was $1.13 billion, an increase of 6 per cent from the prior-year quarter. The figure narrowly missed analyst expectations of $1.14 billion, according to IBES data from Refinitiv.
Snap announced in August it would lay off 20 per cent of all employees and discontinue projects such as gaming and a flying camera drone, in order to cut costs and steel itself against a deteriorating economy, Reuters reported.
The Santa Monica, California-based company said it would refocus on growing its user base, diversifying its revenue sources and investing in augmented reality technologies, which overlay computerised images onto the real world.
The restructuring will help Snap "make as much progress as possible, as quickly as possible, in the areas of our business that we are able to control," Snap Chief Executive Evan Spiegel said during a conference call with analysts.
Daily active users on Snapchat rose 19 per cent year-over-year to 363 million during the quarter.
Snap said advertising revenue has historically followed the growth and engagement of its user base, and "we remain optimistic about our long-term opportunity".
But as advertisers face an economic downturn, they are likely to consolidate their ad spending to fewer and stronger platforms, said Kelsey Chickering, principal analyst at Forrester.
"Unfortunately for Snapchat, their share of advertiser budgets will likely shrink further, as marketers shift into the most efficient and proven channels," she said.
Snap said it expects Snapchat daily active users to grow to 375 million in the fourth quarter.
Adjusted earnings per share was 8 cents during the third quarter, beating analyst expectations of breakeven.
The company on Thursday also announced a share buyback programme of up to $500 million, according to Reuters.