Snap plummets as Apple’s privacy change hits sales

Yahoo Finance’s Julie Hyman, Brian Cheung, Brian Sozzi, and Dan Howley discuss Snap’s latest earnings report, and how its impacting other tech stocks.

Video transcript

JULIE HYMAN: Let's move on to Snap, speaking of something that the Street is not getting used to at all. Those shares are down by 22% right now. The company pretty much coming out on any which way you slice it with negativity here on the call, in the statement. And there are two things at issue, as you see these numbers for the quarter that didn't miss estimates, but it's the forecast here that is well short of estimates, particularly the EBITDA forecast for the fourth quarter as well as the revenue forecast.

And I will admit, you guys, to a blind spot when it comes to big-cap tech because I've been saying, well, maybe big-cap tech is going to be less vulnerable to some of these supply-chain shocks, forgetting, of course, that their clients are still vulnerable to these issues. And that's part of the case with Slack where-- Snap, excuse me-- Snap-- which is talking about its clients not wanting to spend as much on advertising because they're not necessarily doing as well or at least don't have the same visibility. And then there's also the change to Apple iOS that is hitting Snap.

Brian Cheung, I mentioned the doggy filter in the open. I've got no idea what the most trendy doggy filter is, but you sent us a number of fun filters for yourself. But, you know, no matter how popular the service is, if it's having trouble monetizing, then that's an issue.

BRIAN CHEUNG: Yeah. No, it certainly is. And I think that we just have to acknowledge that Snapchat, for what it's worth among millennials-- even though I'm a '93 baby, I'm actually not in the target demo for Snap either. A lot of me and my peers fell out of using Snapchat around 2015 or 2016, but the Piper Sandler team survey verifies that it's actually not TikTok that's the most popular platform. It is Snapchat. They've got 35% share in this market.

So we have to remember that none of that is changed by whatever they cited as issues in this particular report. Obviously with some of the changes that the iOS platform has made, which we'll get into later, and then also, interestingly, supply chains-- I mean, at the end of the day, it doesn't matter how many impressions and users you have on the platform. If you can't monetize that, that doesn't matter.

We know that Snapchat has, in previous quarters, done an interesting job and a pretty good job at getting the revenue stream in place for advertising. But apparently with these supply-chain constraints-- you could argue to what degree maybe Snapchat using that as cover. But apparently that's affected so many businesses that they have pulled back on their advertising budget on platforms like Snapchat, which I think is a big reason why that supply-chain story might be applied to all these other big tech companies that rely on advertising as well. If the advertisers themselves don't have anything to advertise because they don't have anything to sell because it's stuck on a boat outside of LA, that's a big problem.

BRIAN SOZZI: Yeah, I've got a good filter here to use. You can really use probably one that poop filter and put it over this quarter here because that's how the quarter looked in terms of relative to where Snap has been before and in terms of how their earnings conference call went. It was very disappointing.

And you just look at some of the valuations on Snapchat, and I-- look, forward earnings-- trading at 130 times forward earnings. On a trailing basis, 42 times trailing book value. I know that sounds like a lot of gibberish here on a Friday morning, but bottom line is Snap has been priced for extreme perfection, and they did not deliver it in this quarter. Also did not deliver in its guidance.

And, Julie, I am amazed by how many analysts are coming out here trying to defend this stock here this morning. They're all lowering their estimates, lowering some price targets here, but they're trying to say Snapchat remains a very good investment, and it might be. But over the next couple quarters, it's going to be very challenging, and it's hard to believe Snap won't be back here three months from now reporting similar concerns and potentially seeing its stock slammed again.

JULIE HYMAN: Yeah, you had one of these sort of classic disconnects, perhaps, in some commentary I saw from Brad Erickson, who's an analyst at RBC, who said, quote, "Management almost couldn't have sounded worse around the effects this is having." Speaking about the Apple effect in particular, but he has an outperform, and he's bullish on the long-term prospects even though he says the leadership may have been permanently damaged by this quarter.

I do want to talk more about those Apple iOS changes because they are dinging the estimates from analysts for other companies, notably Facebook and Twitter. So to explain what exactly is going on here is our Dan Howley, who has been covering these changes.

So basically, Dan, when I now am on my iPhone and I get on Snap or Facebook or Twitter, they say, would you like to be tracked across other websites and apps? If you say no, what effect does that then have on the likes of a Snapchat?

DAN HOWLEY: Yeah, essentially it kind of shoots them in the foot, right? This is a feature that Apple introduced in iOS 14.5 back in April, and now we're just starting to see the effects of it on these big companies.

So let me just give you a basic rundown of what this is. Apple has this thing or had this thing called IDAF. It's basically a unique identifier for advertisers, IDAF-- sorry, IDFA. And so what that does is it allows advertisers to look at different iPhones-- not personal data, not, you know, down to pinpoint, but it allows them to get a good idea of the type of people that are using some app-- so Snapchat, for instance, in this example. But with 14.5, iOS 14.5, they allow people to essentially turn that off so that they're not being tracked or advertisers can't see a better idea of what these people are doing.

Now, Apple did introduce its own new proprietary solution to kind of take the place of that IDFA. It's called SKAN. But according to Snap, while it looked promising at first and lined up with prior IDFA measurements as well as their own third-party measurements, as the quarter went on, the results started to diverge, so they see that as unreliable.

So essentially what's happening now is advertisers can't see what their money is going to and how that's impacting users and whether or not it sends them to ads, how quickly it sends them to ads, or whether or not that sends them from an ad to make a purchase. Basically advertisers are looking at this and saying we're throwing our money into a black hole and we don't know what's happening.

So that's why Snap is so kind of impacted by this and why you're seeing peers like Facebook, Pinterest, Twitter gets slammed now because now investors are saying, well, if Snap was hurt this badly, what does that mean for the competition?

And so we're going to have to see, really, what Apple does as far as navigating or improving that SKAN capability. And it's important to note that, yes, Android is the larger operating system globally. Obviously Snap is not a pure global company. They're not everywhere in the world. But when it comes to advertisers, iOS users are more coveted because those users are more likely to spend on advertising-- or on goods that they're advertised.

It's the same thing why Apple's App Store makes more money than Google's Play Store despite Google having a larger presence, because iOS users tend to be more affluent and so they're willing to spend more. And so that's why we're seeing these issues right now.

BRIAN CHEUNG: Well, I guess one more reason to shade those with the green text bubbles. But, Dan, I guess I just wanted to ask as a follow up there, this kind of underscores how fragile this whole tech ecosystem is, right, that you have one tech company that can see as much of a substantial hit as a 20% change on their stock because of the decision of one company in terms of how to look at privacy settings, and it shows that Apple is still a gatekeeper here. But given the market strength that they have over the whole big tech industry, does this open the door to even more water in the argument for antitrust against the likes of Apple and Google?

DAN HOWLEY: I don't know if this necessarily does. I think it just proves that they are, as you said, kind of a gatekeeper, and they are the 800-pound gorilla in the room whenever any app company has any kind of discussion as far as users go. I mean, look, Apple and Facebook have been going back and forth for some time. Facebook needs Apple, you know, just as much as Apple needs Facebook. But I think it's more Facebook needing Apple than the other way around. And the same thing goes for Snap and Twitter. They need these users. And because iOS is so popular, it is a big deal.

And I think that, you know, when you look at the changes that Apple has made, they position it as improving privacy for users. And, yes, that is true, but it's also worth noting that Apple does have its own ad-network capabilities, and it is building out its own ad business-- continues to do so. So there's a little bit of kind of, you know, is this going to benefit Apple and hurt competitors? That is also part of the discussion as well, though obviously Apple's advertising business not nearly as important to it as its hardware business.

JULIE HYMAN: Dan Howley, thanks so much for walking us through all of this this morning.

And just to put a fine point on it-- I know we have it up on the screen, but Facebook shares are down 5%. Twitter shares are falling also.

One analyst who weighed in on this this morning, Morgan Stanley's Brian Nowak, said he sees the effect of these Apple changes are going to hurt Facebook's revenue by the low- to mid-single-digit percentages and that Twitter could be hurt even worse than that. Both of those companies report next week. We are going to be watching those numbers closely for signs of all of this.