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Snap earnings: We’re in an ‘online ad market recession,’ analyst says

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MKM Partners Sr. Analyst Rohit Kulkarni to discuss second-quarter earnings for SNAP, the company’s plans to slow hiring, volatility, competing with TikTok, recessionary risks, the Twitter vs. Elon Musk uncertainty, and the outlook for the online ad market.

Video Transcript

JULIE HYMAN: Shares of Snap plummeting this morning after the California-based camera company-- is it still a camera company-- missed revenue expectations and warned that it faces incredibly challenging conditions. That, of course, is putting pressure not just on Snap, but on social media stocks overall at a high-stakes moment for Twitter as well. There's a lot going on with social media.

Joining us now to help understand it all, MKM Partners Senior Analyst Rohit Kulkarni. It's good to see you. Let's start with Snap because it feels like that that is the biggest situation that's going on, at least at the moment, now that Twitter's receded a little bit. How much are you extrapolating from Snap to the rest of the industry? Or do you think a lot of the issues here are Snap specific?

ROHIT KULKARNI: Hey. Thanks for having me. Tough day. And I think we are already in a, I would say, online ad market recession. Q3, the way it looks like, the shape of things is, despite easier comps, we are going to see declines, year-on-year declines, in ad spend in 3Q when all is said and done.

On Snap specific, I think it's a 50/50 situation. There is-- online ad market is slowing down. But Snap is probably getting a more worse hit in the near term, simply because A, they have more experimental ad budgets. They tend to work more with the mobile-only companies or internet-only companies, which are obviously slowing down more since the pandemic. And third is they get hit by Apple, what Apple is doing, and they continue to get hit by that. So I feel these three factors are hitting Snap a little bit more.

But macro and online ad market is slowing down. It's slowing down rapidly. And I feel that's what has caught everyone by surprise. We did a lot of calls with agencies, and everybody said-- talked about slowdown and slow movement in incremental ad budgets. But the story that Snap is trying to portray is a very rapid deterioration and going from 50% growth to 0% growth in a matter of less than three months. So that's very surprising.

BRIAN SOZZI: Rohit, I'm trying to figure out should Snap even continue to be a public company? Because you cannot continue to put up results like this. We could very easily be having this discussion three months from now after another bad quarter and now Snap shares are at $5.

ROHIT KULKARNI: That's a hard question for me to answer. In my opinion, I think the volatility that Snap is facing and Snap is reporting in their end markets is something that is probably part of the growing pains in the company. On top of that, I feel the externalities that companies, just Snap, is facing right now, Apple and TikTok are unusually hard for the company to get their hands around. So I feel this company is going through a near-death experience.

There is macro. There is Apple. And then there is TikTok on top of that. There is their customer concentration. So there are issues. Some of them are fixable. We like the user growth story. We like what they're doing in augmented reality.

There is innovation across the board. So this may be the house that is kind of the least worse off in a burning neighborhood. So that's how I portray Snap. But a hard question to answer it. I'm not skirting around it.

- OK. And so if TikTok, perhaps, is the mansion that's being built in the neighborhood, then where is Snap sitting in a go-forward basis from this point as advertisers are going to look towards where that lifetime value is for the number of consumers that they're looking to engage with?

ROHIT KULKARNI: Probably in the waterfall of overall online ad market. Historically speaking, you've had Google followed by Facebook, Instagram followed by YouTube followed by Snap. I think as this waterfall progresses, as this waterfall of incremental ad dollars-- I'm talking about you have-- you want to go from $100 to $150, where do we spend those $50?

That incremental ad budget, now, TikTok is coming somewhere in between probably above YouTube, probably trying to go above Instagram as well. So that is affecting all the companies below that step in that waterfall, and that remains to be seen at what point does a company like Snap settle from grabbing those incremental ad budgets? I feel they're still in the early innings.

Given what they have done, going way back to Instagram stories and they have had that near-death experience of losing users, losing engagement and coming back from that, there is history of resilience in this company. So I feel over the next 12 to 18 months, we may look back and see that this battle versus Apple, TikTok, and various different friends that they're having was something that they were able to endure out of.

JULIE HYMAN: So Rohit, resilience, talk of resilience, brings me to my next topic, which is Twitter. And I think-- let's just assume as a baseline here that the company is not going to be owned by Elon Musk a year from now. How do the fundamentals of Twitter look to you based on the non-conference call but numbers that we got today?

ROHIT KULKARNI: That's a big assumption. So again, as far as Twitter, Twitter has been in a-- has been a company in transition mode trying to force the fundamental transition going away from brand towards direct response. That's the bigger pie. That's where Google and Facebook make hundreds of billions of dollars of money online. And Twitter is probably making less than a couple hundred million dollars, despite being around for more than 15 years.

So the transition that they're trying to do away from brand to direct response has been slow with a lot of hiccups. We haven't seen that-- any evidence from looking at the numbers, looking at the disclosures that transition is actually taking shape. Remember, not too long ago, they gave these lofty long-term targets of what they would look like in '23 and '24 at the analyst day last year.

Nobody on the street, unfortunately, believes that, even leaving aside Elon Musk's story that transition is something that is going to be very hard. So from Twitter standpoint, if this is a public company this time next year, then there's a scenario that they are probably struggling with the transition. Users are the only kind of silver lining here. But from an ad tech standpoint, transition to direct response, it remains a show me story.

JULIE HYMAN: Yeah. Users are all well and good, but if you can't make money from them or more money from them, then obviously that's a problem. Rohit, thank you so much. Rohit Kulkarni of MKM Partners, appreciate your time this morning. Have a great weekend.

ROHIT KULKARNI: Thank you.