Despite a troubling backdrop for the broader social media sector, youth-centric Snap (NYSE:SNAP) found its shares moving up significantly one day ahead of its earnings report for the second quarter of 2022. Earlier this week, Snap announced its paid Snapchat subscribers can access the platform’s instant messaging and video call features on web browsers, a new feature. However, fears exist that this move may not be enough for SNAP stock.
In late May of this year, management warned the advertising market is slowing down, noting “the macroeconomic environment has deteriorated further and faster than anticipated.” Naturally, the big concern is dependency. According to Statista, in 2021, Snap generated $3.1 billion in advertising revenue. However, total revenue last year came out to $4.1 billion, meaning that advertising accounts for three-fourths of all sales.
Therefore, it’s no surprise that even with the recent bump up in SNAP stock, shares are down approximately 67% on a year-to-date (YTD) basis.
Adding to the pressure cooker is Meta Platforms (NASDAQ:META), which owns the Facebook juggernaut. CEO Mark Zuckerberg set off alarm bells when he mentioned that a growth pullback could turn severe over the coming months. Interestingly, like SNAP stock, META is also a beneficiary of near-term momentum, gaining nearly 12% over the trailing five days. However, it too is down big this year, shedding roughly 47% YTD.
SNAP Stock and Capital Spending Concerns
In Snap’s Q1 earnings report, the social media firm delivered plenty of good news, including an 18% increase in active users. This helped keep advertising revenue at parity with the prior-year period’s gargantuan results, a direct beneficiary of the unique circumstances of the coronavirus pandemic. As such, Snap released dozens of new features, including the aforementioned web browser access.
However, now that the realities of the current economic environment are seeping in – not just for SNAP stock, but also for its mainline competitors – Snap could target a reduction in its capital spending plans. In an ecosystem of debilitating inflation and the subsequent erosion of real worker earnings, investors are placing greater emphasis on profitability and quality (or predictability) of earnings.
Longer-term, Snapchat’s youth-oriented userbase may become a liability. Additionally, tech layoffs are rising, which could then spill over to lower consumer demand for myriad industries. Because of this potential dynamic, people may spend more time on “productive” platforms like Microsoft’s (NASDAQ:MSFT) LinkedIn to help build professional networks in a bid to survive a troubling economic wave.
Pressure to Stay on Track
Earlier this year, Snap highlighted many opportunities for investing its positive cash flow. These included augmented reality applications, new chatting functionality and even original media content. However, with the economic paradigm shifts affecting SNAP stock, management may encounter challenges. Essentially, a recessionary cycle implies a smaller margin of error for new initiatives.
Still, the one point of encouragement is that SNAP stock – despite the warning signs – is up ahead of its Q2 earnings report. Ultimately, investors should watch the proceedings very carefully and be ready for sharp movements.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.