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Snap shares plummet over 20% after q3 revenue miss

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Mark Shmulik, Bernstein VP, US Internet joins the Yahoo Finance Live panel with the latest on Snap earnings.

Video Transcript

ZACK GUZMAN: And Mark, I mean, when we look at it, you know, you cut your price target by about 5 bucks, if I'm looking at it right, down to $80. So it's well above where we're at now. I suppose it would be signals to investors that now's not the time to panic. So talk to me about what you saw in this report.

MARK SHMULIK: Yeah, look, it wasn't a great report. I think the stock price reflects it. You know, but if we step back beyond just the kind of the intraday trading, the stock's still up on the year about 11 plus percent. And so, you know, to me, what had happened was a couple of things, right? The first thing is, you know, it's really all about the guidance because Q4 was probably the first quarter coming out of the pandemic where the year over year comps were closer to normalized.

And in their investor day earlier this year, Snapchat's management effectively said, you know, we're well positioned to grow 50 plus percent for the next several years. And so then coming out with a guidance in that kind of 28% to 32% range is significantly below that. The reasons that they stated were really two. One is supply chain constraints, and the second is changes to Apple's IDFA kind of tracking mechanism. So now you have to opt in to ask the user to track their IDFA.

Why I think it's important is because, effectively, management missed it. You know, in prior quarters, you know, they felt that they had a good handle on it. They trusted Apple and Apple's own kind of alternate measurement system called SCAD network. And the reality is, is that didn't deliver what advertisers were looking for.

So there's really two issues with that. The first is, well, why did management miss it? Because we know Facebook's been very aggressive at building out workarounds, et cetera. And the second thing is, well, are these just transitory issues, or are they permanent? My view is that they're transitory. And so supply chain should, you know, maybe hit Q4, trickle into Q1. But then we're done. You know, and the IDFA issues, I think, might take a little bit longer to resolve, but they will resolve.

And so, as we kind of get out of, you know, these near-term headwinds, the long-term story is still intact. I don't believe management's going to make this type of mistake again. And so I'm kind of giving them the benefit of the doubt. I believe their story that the long-term growth prospects are intact. And so that's why I've only taken down my price target by 5 bucks.

AKIKO FUJITA: When you look at just where things are moving in some of the social media names today, that seems to suggest that investors are looking at what happened with Snap, saying, well, we'll probably see the same with Facebook and others. Is that the way to look at this? I mean, especially on the supply chain stuff here, if the explanation from Snap is that advertisers don't necessarily want to ramp up their advertising when they don't know if they're actually going to have the product, is that something that you're seeing across the board in the space?

MARK SHMULIK: You're certainly seeing it in pockets. And obviously, the retail advertising, you know, you could see that even more pronounced. You know, and then the question is just to what impact is it going to have? I've seen, you know, retailers that are kind of taking a look at their Q4 inventory and saying, we might not be getting any more due to some supply chain constraints. So why don't we try to sell the product now, when advertising is cheaper?

We have others saying, look, if we don't have any product, you don't need to spend on advertising. So you could either move your performance marketing to brand or just stop spending altogether. And so, to me, those platforms that have a larger SKU or exposure towards retail, you know, I think those are the ones that you might see an outweighted effect, so platforms like Amazon, like Pinterest, to some extent, Facebook.

You know, on the other hand, you may have something like Google that may actually benefit from it. And, you know, it's certainly kind of still too early to really call. But, you know, if you go to your favorite retailer and they don't have your product, you know, you may end up on Google searching for a substitute. And so, you know, there may be some balancing act of what happens.

And I think what I'm seeing when I'm looking across the sector is, everyone's getting hit pretty hard. Everyone's stock is getting hit, more or less, equally. Though tied to supply chain constraints and IDFA and otherwise, I don't think we're going to see an equal impact across the sector. It will be more pronounced to advertisers that have that higher retail exposure.

ZACK GUZMAN: Yeah, I mean, I guess, just to underscore some of the points that you made here to highlight the longer term or maybe some of the positives, right, I mean, obviously, this is a pretty extreme reaction. We can talk about it being an overreaction. But when you look at the positives, user growth 23% year over year.

Also-- what was it-- a second straight quarter, two quarters of positive free cash flow, when you look at how Snap's maybe turning that story around. So when you do look out, I mean, what else really stood out to you from what we heard on the earnings call around maybe where Snap is building a lead over some of the other advertising giants here and what they offer versus the Facebooks, the Twitters of the world?

MARK SHMULIK: Yeah, I think what they offer is a unique demographic. And the way they're building out their platform is effectively offering advertisers the chance to go after that demographic in a variety of different ways. And so, you know, what they always share with us is the percentage of, you know, the number of countries where 75% of 13 to 34-year-olds use Snapchat daily and where 90% of 13 to 24-year-olds use that platform daily. And I fully expect the number of markets where they're doing that, which is five right now, to effectively double over the next year or so. So they're clearly gaining that penetration.

And what they've also done is they're also introducing more ways to use Snapchat that you can imagine how it will be appealing to advertisers. And so, you know, whether it be moving beyond kind of, like, the sponsored lenses, you know, they're now getting into professionally produced content through Snap Originals, through partners on stories, through using their own version of Spotlight for short form video, maps, you know, for local-based advertising. And so you could see, as an advertiser, how valuable that demographic can be.

And what Snap is building is really a platform in a multitude of ways to literally go after and target the user, depending on how you want to go reach them. So it's not just simply, let's just do our performance marketing, simple story ad. There's going to be effectively a pilot or a menu to choose from that advertisers can effectively customize and deliver an experience that they want and a message that they want to their users in a very kind of tech-first, unique way.