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With Snap surprising Wall Street with a second-quarter revenue warning on Monday, noting that “the macroeconomic environment has deteriorated further and faster than anticipated” since its last earnings update, some media analysts are assessing the potential advertising impact on other sector players.
Wells Fargo’s Steven Cahall in a Tuesday report offered up “helpful quick data points as investors look to react to a fast-changing environment.” He started by summarizing “what we learned in the 2020 ad recession,” explaining: “During the early days of COVID-19, digital ad spend snapped (no pun intended) down quickest, with local TV and radio following shortly after. National TV and out of home was much later, and ad agency spend was also later cycle as we think media buying is quick to move while creative is not.”
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If things move similarly this time, Cahall has these predictions: “It likely means that within our coverage converged TV (e.g. Roku, Vizio) and AVOD (e.g. Paramount‘s Pluto TV and Fox‘s Tubi) will be hardest hit initially. The length and depth of the recessionary slowdown will determine whether pain makes its way to the longer cycle areas of the ad market.”
The analyst also took a closer look at advertising as a percentage of total revenue and earnings at various ad and media companies. “Assuming 10 percent downside to our ad revenue estimates for 2022-24 and decremental adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins that are equivalent to total company EBITDA margins, we get 9-10 percent earnings downside risk at the most ad-heavy names like (ad giant) Omnicom Group, (out-of-home ad company) Clear Channel Outdoor, (radio powerhouse) iHeartMedia, (ad giant) Interpublic Group and (radio firm) Audacity, and then mid-single digits for TV network operators,” Cahall suggested.
The Wells Fargo expert added: “However, assuming much higher decremental margins based on our knowledge of operating leverage, we get to substantial EBITDA downside at Roku (-45 percent in part due to high ’22E operating expenses), Paramount/Clear Channel Outdoor/(billboard company) Boston Omaha/Audacity (about -20 percent) and Fox/Vizio/iHeartMedia (about -15 percent). The steeper declines reflect ad exposure and/or lack of offsetting businesses.”
In its first-quarter earnings disclosure in April, Snapchat’s daily active users hit 332 million, an increase from 319 million at the end of 2021. Snap CEO Evan Spiegel described the first quarter as “challenging” and said “we also recognize that we have a significant amount of work to do to realize our long-term opportunity.”
Evercore ISI analyst Mark Mahaney in a report noted that Snap’s warning “suggests that in just a month, the environment has aggressively deteriorated further. We see no real reason to not take Snap’s negative pre-release at face value. Digital advertising is cyclical, but like all advertising, and macro headwinds are very likely getting much harder.”
Mahaney also highlighted the likely impact across the digital ad space. “We view Snap’s negative pre-release as a negative read-through for the rest of the internet advertising sector,” he wrote. “Snap accounts for only a small low-single digit percentage of total digital advertising, but the macro factors cited should be relevant for all companies. Two key callouts, however. Europe does account for 15 percent of Snap’s ad revenue, and brand advertising is approximately 40 percent-45 percent of Snap’s total ad revenue.”
Concluded the Evercore ISI expert: “With this context, we believe the read-through is most negative for Twitter, which is 75 percent dependent on brand ad revenue and has 15 percent-20 percent exposure to Europe. Facebook also has significant European exposure (25 percent of its ad revenue), though its brand advertising exposure is likely well under 25 percent. And Google would skew similar to Facebook in terms of its ad revenue makeup, though ad revenue makes up 80 percent of its total revenue.”
Mahaney lowered his second-quarter forecast for Snap revenue and earnings, and cut his price target on the company’s stock from $47 to $36.
Meanwhile, Cahall on Tuesday also reminded investors of his favorite stocks “in this tricky time,” including satellite radio giant SiriusXM, sports entertainment powerhouse WWE, Imax and TV station company Nexstar Media Group, citing “lower ad exposure and solid free cash flow/balance sheets.” But he also emphasized: “These tactical recommendations may not necessarily align with our longer-term investment theses.”
Shares of Snap tanked more than 35 percent in early Tuesday trading, trading down 36.9 percent at $14.17 a few minutes into the trading session after hitting a new 52-week low.
Other stocks were also lower in early trading. Shares of Roku were down 10.2 percent, Facebook parent Meta‘s stock fell 7.4 percent, and Twitter shares were trading 2.1 percent lower.
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