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Apple & TikTok (and the Shift in U.S. Economic Mojo) Break Snap Inc.

Thomas Paulson
Jul 22, 2022
Apple & TikTok (and the Shift in U.S. Economic Mojo) Break Snap Inc.

  • We've spoken quite a bit in the past about the theme that the economic mojo in the U.S. has moved to the in-person physical and away from the stay-at-home digital due to the rising costs in digital customer acquisition stemming from Apple’s IDFA / privacy changes. The extent of these changes is not only apparent in economic data, but also in the broad number of hiring freezes and payroll reductions across both small and large technology companies (including Microsoft, Google, Meta, Uber, Lift, Peloton).
  • Snap Inc., which has already lowered its revenue forecast multiple times this year, reported a steep deceleration in revenue growth. This includes in the U.S., where revenue per daily user decelerated to +8% growth in 2Q22 from +31% in 1Q22 with 3Q22-to-date running flattish.
  • Snap Inc. CFO Derek Anderson said during the company's update that, "Over a longer trajectory here, we've observed a fairly steady deceleration in demand over the last year. The deceleration began with the platform policy changes [i.e., Apple] implemented in 3Q22 of last year. Those policy changes upended a decade of advertising industry standards, and in turn, the model is used to drive the direct response to advertising business as well as the tools used to measure the returns from that direct response advertising...In certain other high-growth sectors where businesses are seeing higher cost of capital, that's further reflected in their campaign budgets and their [lower] level of bids per action."
  • Isn’t this all macro and foretelling of a recession? The IDFA and shift from in-home to on-the-town purchases are "macro" and not "micro" or company specific. Moreover, the three advertising holding companies that reported this week (IPG, Omnicom, and Publicis) all exceeded expectations. IPG reported +8% organic revenue growth in the U.S., Omnicom +11%, and Publicis +10%, margins surprising to the upside, and each company maintained their 2H22 outlook for revenue growth (albeit at a slower rate). Compared to Snap Inc., Twitter, Meta, etc. the advertising holding companies have greater exposure to: (1) multi-national advertising clients versus small/medium businesses (SMBs); (2) a more diversified revenue base than just media buying; and (3) longer-duration client contracts. Publicis also shared its client organic growth by industry, below, and that growth is broad.

  • The Wall Street Journal wrote a comprehensive article about Snap Inc.’s challenges here.
  • Where this leaves commercial real estate and retail is that if brands can’t rely upon and trust social media for customer acquisition and activation, they will rely more upon physical real estate and stores (distribution and product promotion) for these business needs.
  • Silicon Valley Bank lowered its annual guidance with the release reading "private markets increasingly felt the impact of continued public market volatility. The IPO window remained closed and, in contrast to the first quarter when public market declines mostly affected later-stage companies, companies across all investment stages experienced challenges to accessing liquidity, with total VC investment declining 24% QoQ. The reduction in client fundraising, coupled with increased burn rates–as companies with already accelerated burn rates took proactive actions to reduce future spending–pressured 2Q22 balance sheet growth…We have adjusted our full-year 2022 outlook to reflect our expectations that challenged public equity markets and declines in venture deployment will continue for the remainder of 2022, which will pressure our balance sheet growth…we expect net charge-offs (NCOs) to increase in 2H22 and have proactively raised reserves."
  • At a basic level, where this leaves Silicon Valley Bank is that with less funding and fewer public-market IPOs, its commercial customers have less deposits in their accounts. Less deposits means that the bank has less to loan. Fewer loans suggest less interest income in the near-to-medium-term. Added to this is the risk that some of its existing loans to customers will not be repaid. As such, the Silicon Valley Bank had to increase its loss reserves ($200M in 2Q22).
  • We've written in the past about how the technology sector's issues in 2022 will potentially become a positive to commercial real estate as its tenants will no longer be competing against a multitude of disruptors that have poor or negative unit economics, where those disruptors enjoyed very prolific amounts of capital that had a very modest cost-of-capital (i.e., a period of "easy money"). The chart below from Silicon Valley Bank’s 2Q22 update presentation highlights what "prolific" capital looks like:

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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