Snap & Twitter – Snap to reality

Snap Q2 2022: Out of road.

• Snap’s growth has ground to a halt as a result of the recession and greater competition meaning that the focus needs to be on what this company is worth now rather than some pipe dream in the future.
• Q2 2022 revenues / Adj-EPS were $1.11bn / LOSS$0.02 broadly in line with consensus but the lack of visibility for Q3 2022 and the admission that growth has stalled sent the shares down 39%.
• The combination of increasing competition from both TikTok and Instagram Reels as well as the poor economic outlook have dealt a double blow to Snap which has probably fared the worst of all of the advertising-driven digital ecosystems.
• Results from Seagate which forecast revenues of $2.35bn in Q3 2022 compared to consensus of $3.00bn is an indication of just how suddenly the economic slowdown is hitting demand with the situation quickly going from supply constraint to surplus.
• Snap still has an EV of $15.1bn which for a company that is generating $4.4bn in revenues and not growing still looks very expensive.
•  This is because one is currently paying 3.4x 2022 EV / Sales for a company that is not growing and barely makes any money.
• The good news is that Snap has a large cash reserve and is just about breaking even on a cash flow basis meaning that it should be able to sit out the downturn as long as things don’t get any worse.

Twitter Q2 2022 – Blame game.

• Twitter hilariously blamed Mr Musk for its poor results that were in reality nothing more than a reflection of the coming recession in which companies will spend less on digital marketing.
• Q2 2022 revenues / Adj-EPS were $1.18bn / LOSS$0.08 missing consensus of $1.34bn / $0.14 confirming the macro trend first highlighted by Snap’s sudden revenue warning almost three months ago.
• Fortunately for Twitter, the possibility that Mr Musk is forced to buy the company at $54.20 prevented a Snap-like sell-off but the possibility that this goes ahead as billed is looking less and less likely.
• As I argued a week ago, (see here), it could be quite easy to win the court case but quite another to actually enforce the ruling leaving Twitter in a tight spot.
• Twitter is in a very similar position to Snap with significant cash resources and just about breaking even on a cash basis meaning that it too, will be able to survive the downturn.
• However, I don’t think Mr Musk has anything to do with the slowdown in revenue growth meaning that Twitter is suffering from the same pressures as Snap (see above) but is fortunate to have a bid in the market to support its valuation.
• Compared to Snap, Twitter is looking extremely overvalued, and I would not hesitate to sell if I owned any (which I don’t).

Take Home Message

• All eyes will now turn to Meta which reports on Wednesday and Alphabet which reports on Tuesday.
• I suspect that both companies will be pretty sombre in their outlook but they are in a better position than both of their smaller competitors with a much wider spread of businesses.
• Almost all of the technology sector has slowed hiring and is battening down the hatches for a period of economic weakness that is going to slow their growth down to a crawl or even reverse it in some circumstances.
• The problem is that the sector is still priced for growth in many instances, and I suspect that there is more weakness to come as growth evaporates leaving high multiples with no support at all.