Social media stocks plunge following a profit warning from Snapchat parent firm

Snap says sales and profitability for the second quarter will be below its previous forecast, sparking a sell-off of online ad-driven stocks

A profit warning from Snapchat's parent company sent its shares crashing over 40% on Tuesday, triggering a sector-wide sell-off as the social media firm signalled tough times ahead for the once-booming digital ad industry.

In a statement made public on Monday evening, the company said that the macroeconomic environment has deteriorated "further and faster than anticipated" since 21 April 2022, when the company issued guidance.

Snap said that it now anticipates sales and profitability for the second quarter to be below its previous forecast range.

The profit warning caused the share price of Snap to drop to $12.79 at the close of the day, below its original public offering price of $17 in 2017.

Google-owner Alphabet, Facebook-owner Meta, Pinterest and Twitter were also down between 7% and 24% and had over $201.8 billion wiped off their valuations on Tuesday before rallying and regaining some ground.

Other major players whose stock prices went down included Trade Desk (down 19%), Magnite (down 13%) and Roku (down 14%).

The profit warning is a dramatic reversal of fortune for Snap, which is heavily reliant on revenue generated by digital advertising.

It was only in February that the firm reported its first ever quarterly net profit. It was a piece of good news that stood in stark contrast to an announcement made by Facebook parent Meta the day before, in which it said it expected its revenue to decrease by $10 billion over the course of the year as a result of privacy-focused changes made by Apple in its iOS mobile operating system.

The decline in spending by advertisers as a result of concerns about a downturn in the global economy has also resulted in a decrease in the values of technology companies that get the majority of their income from advertising spending.

"At this point, our sense is this is more macro and industry-driven versus Snap specific," Piper Sandler analyst Tom Champion wrote in a note, according to Bloomberg.

Others on Wall Street shared this sentiment, including Citi analyst Ronald Josey, who stated that "a slowing macro is likely impacting advertising results across the broader Internet sector, although we believe platforms more exposed to brand advertising—like Twitter, Google's YouTube, and Pinterest—are likely experiencing a greater impact overall."

Dennis Dick, a trader at Bright Trading LLC, said: "Snap is a proxy for online advertising and when you see weakness there then you automatically think Facebook, Pinterest and Google."

He added: "Once you start thinking about Google, that's when the markets start to sell off."

During this challenging period, Snap, along with other platforms such as Facebook and Google, are vying for the advertising revenue.

The ever-increasing rate of inflation is exerting pressure on companies and consumers, and recent modifications to privacy policies, such as those implemented by Apple, have hindered the growth of firms that were thriving during much of the pandemic.

User growth is another major focus for social media companies, as they compete to attract new users to target with ads in an already saturated market.

Analysts believe Snap's outlook for core profit suggests spending may outstrip revenue growth, given that staff increased 52% in the previous quarter.

Snap CEO Evan Spiegel said in a memo to staff on Monday that the firm will continue to invest in growth and aimed to add more than 500 new team members by the end of 2022, a 10% increase in headcount.

However, he added that department heads had been instructed to identify ways to cut costs in their respective budgets.