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Snap layoffs are ‘the first step’ toward aligning costs ‘to the new reality,’ analyst says

Jefferies Equity Research Analyst Brent Thill joins Yahoo Finance Live to discuss Snap laying off 20% of its workforce, investor confidence, advertising, competition, and the outlook for year-over-year growth.

Video Transcript

BRIAN SOZZI: Snap shares went on a roller coaster ride this week after the company announced it will lay off 20% of its workforce. The turnaround plan, while not a surprise for most on Wall Street, was way worse than most analysts covering the company feared. Our next guest says Snap has a long way to go before gaining investor confidence back.

Joining us now is senior analyst at Jefferies, Brent Thill. Brent, always good to see you. Enjoyed your note on Snap after the results, after that announcement came out. What do they need to be doing to regain investor confidence?

BRENT THILL: Well, I think this is the first step, which is getting the costs aligned to the new reality. The world is slowing. And the first thing that goes is advertising. And as advertising slows, Snap slows. And so you've seen this across Meta, Snap, Twitter, go through the whole list. They're all seeing the same thing. So this isn't Snap-specific.

So good for them to get their cost control and get in front of the puck on that. Obviously you don't want to see 20% of the workforce go. But I do think where they took out the majority of the cuts are in non-critical areas that aren't core to Snap, gaming, mini-widgets, and hardware. And if you think about flying drones with cameras, those aren't high-margin products.

So in situations like this typically, stocks can go down. Stock's ripping up because investors are applauding the cost control, number one. Number two, they said flat growth last earnings. Now they're saying 8% growth. So growth is starting to reaccelerate, which is way better than what people thought. And then third, everyone on Wall Street gave up on the stock. I mean, it trades under three times sales. And it's cheap. And everyone loved it at 10 times sales.

So I think if you talk about a sentiment reversal, at least in our client base, who are large institutions, this has been their least favorite, which is actually a bullish sign, that a lot of the negativity is in.

So yeah, look, no question the departure of the two execs to Netflix is a huge hole. They're not out of the woods yet. As we said, it's going to take time for them to regain credibility. Who is the team? And how can they execute?

But I go back to, if you talk to any teenager, and you say, what's on your phone, they're glued to Snap still. And you look at the user numbers. The user numbers have been very good. It's an advertiser issue. This is a macro issue.

And we don't know when it gets better. I think ultimately, the macro economy is going to get worse before it gets better. And a lot of the forward-looking data we look at is pretty negative. And I think next year is going to be a really tough year for the economy. And does that mean that advertisers are going to be full force advertising on the platform in the beginning of next year? I think there's an air pocket.

And so we're not out of the woods. Things could get a little worse before they get better. But we think as you go into the back half of next year and hopefully into '24, things start to slowly improve.

BRAD SMITH: Brent, we've talked about a lot how there's going to be this ramp for advertising dollars, even as there is a vacuum, perhaps, of some of those advertising in the total pie and the spending as companies are looking across where some of their marketing expenses need to be trimmed in this near term to really counter macroeconomic conditions. With that in mind, you've got Snap, you've got Meta that's also going to have to revamp. All of these companies impacted, though, by Apple and privacy changes.

And Apple is also going to be going after those same advertising dollars. Who do you believe has the best upside potential with regard to their advertising revenue growth in that growth rate over this next perhaps year to even 18 months?

BRENT THILL: I think it's a flight to quality. So companies like Google, Amazon, you look at the big platforms the proven platforms-- advertisers talk about the move to where wallets are. The wallet is not at Snap. The 19-year-old kid-- again, I have kids, so I can say this. They don't have the wallets, I do.

And if you think about, we're the ones that are spending. So advertisers are naturally shifting back to those advertising formats where, look, I'm paying the bill for Amazon to buy cleaning and different things for the house, right? So it's probably a better use of dollars for them to go after that.

I think it's also shifted back to Instagram a little bit. We've heard advertisers say that the Apple privacy thing kind of-- the wave came through, crashed, and caused some confusion. But we're hearing advertisers are starting to go back to Meta on Instagram.

And then obviously, the big force in the room right now is TikTok. And so if you think about Meta, Twitter, a number of the social platforms have all been hit with a downturn. And they've also been hit competitively with TikTok. But I do think that, to your question, it goes back to these proven platforms.

It's also moving to connected TV. So companies like TradeDesk have seen a dramatic outperformance of dollars in the last couple of quarters, where what you watch on TV and what I on TV can be the same, but our advertisements should be different. Our ads should be delivered personally, and today we see the same ad. And that is changing. And TradeDesk is enabling that movement to happen for firms like Disney and others.

So I think, again, you go back to flight to quality. Google has a more diverse business. They have an ad business, but they also have a cloud business. They have a number of other initiatives at Google. So we like Google. It's cheap.

But as we come out of this-- and the big question is, when do we come out from an ad recession? We do think that advertisers will come back to these other formats. And the big question is, when do they come back? It feels like we're still, in the next six to nine months, some pretty stiff headwinds.

Good to see things getting a little bit better. 0% growth to 8%, a little bit better. It's unclear how sustainable that is. There's going to be some Fall, obviously, advertisement and campaigns ahead of the holidays. So Snap should help there. So I think, again, we're in a tough period right now for the advertising industry as the macro dims across the board.

BRIAN SOZZI: Hey, Brent, I got 30 seconds left. I saw Snap pulling a potential savings, $500 million. I mean, that is a huge number. And I can't help but think, is this a company trying to just make its financials look a little bit better here or a lot better, and it might be shopping itself?

I mean, Snap's about a $19 billion market cap. It could easily be swallowed up.

BRENT THILL: Yeah, I mean, I think that certainly-- I don't think that they're doing this to be shopped. I think they're doing this because it's the right thing for their health. But the natural outcome of this, to your point, is that we are seeing, across tech, a lot of great bargains. And we are going to see M&A on the rise.

And there's no doubt this is an amazing asset. So I mean, could it happen? Sure. I think there's going to be a tremendous amount of M&A across tech because valuations have been hit so hard.

We're just seeing it in software. I mean, the software M&A growth rate's up high teens year over year. So you're seeing that pick up. And that's kind of a natural consequence of a market pullback. You get some good bargains. And strategics should be out shopping right now.

BRAD SMITH: All right, our team reminding us that Snap shares are down 60% from where they want public. Brent Thill, always a pleasure to speak with you and get some of your insights here on the day. Jefferies analyst Brent Thill joining us this morning.