Snap (Nasdaq: SNAP) shares dropped by more than 25% following the company's third-quarter earnings report which showed a beat on the bottom line but a miss on the top line. Investors sold shares as underlying trends continue to move in the wrong direction.
For the most part, these include the continued rise of TikTok which is now overwhelmingly preferred by 13-24 year olds, the declining profitability of advertising following Apple's (Nasdaq: AAPL) and Google's (Nasdaq: GOOGL) changes to their ad-tracking abilities, and the continued rise of short-term rates which makes investments in growth stocks less attractive.
Inside the Numbers
In Q3, Snap reported $0.08 in adjusted earnings per share which were better than analysts' estimates of a breakeven quarter. The company did take a write-off of $155 million due to restructuring costs, resulting in a net loss of $360 million. Some of its restructuring involves laying off about 20% of the company's workforce which comes out to about 6,000 employees.
Revenue increased only 6% compared to last year and missed expectations at $1.13 billion vs $1.14 billion. Notably, this is the company's first quarter of single-digit revenue growth. The company also beat expectations for its total daily active users at 363 million vs 358.2 million. This was a 19% increase from last year, although average revenue per user declined by 11% to $3.11.
Daily active users increased 19% year-over-year, showing the company is still able to attract people to the service despite the struggles on the business side. Average revenue per user (ARPU) was down 11% to $3.11.
In its conference call, Snap noted that its major challenges are platform policy changes, macro headwinds, and more competition. It also said that advertisers are pulling back on ad spend due to inflation and slowing growth. Due to these uncertainties, it's not issuing guidance for Q4. However, the company sees more slowing of revenue growth in Q4 due to seasonal factors.
The company did authorize a buyback plan of $500 million and has $4.4 billion in cash or cash equivalents. It continues to reduce costs and has terminated many of its side projects such as the Pixy Drone and Snap Originals premium content.
Overall, Snap shares are now down 83% YTD and nearly 90% over the past year. Shares are at their lowest level since 2019 and are even well below the March 2020 levels. One bright spot is it now has a forward P/E of 20.1 but forward estimates could be lowered if the macro environment continues to deteriorate and ad spending drops further.