It's easy to lose sight of the big picture in times like these. Take Twitter, which this morning blamed its second-quarter slowdown on uncertainty surrounding Elon Musk acquisition, as well as "industry headwinds associated with the macro environment." That sounds like Twitter is pandering to the anti-Musk crowd. Given how Twitter has performed in comparison to other internet ad companies in the past, the company 3 percent revenue growth in the quarter — excluding the contribution to the prior year quarter of its recently divested MoPub business — is about what you would expect in this economic environment.
The most obvious comparison is with Snap, which reported on Thursday night that revenue growth slowed to 13% from 38% in the first quarter due to rising inflation and other challenges. Twitter's revenue increased by 22% in the first quarter, so a 19% drop doesn't seem out of place.
Furthermore, during the second quarter of 2020, when Covid lockdowns temporarily crippled the ad business, Snap's revenue growth slowed to 17% from 44% in the first quarter. Twitter's revenue fell 19% after rising 2.6 percent in the first quarter.
Twitter's ad performance lags behind Snap's, but that's nothing new. Snap revenue growth averaged 60% from 2017 to 2021, while Twitter's averaged 16%. Sure, Snap was a younger company that could be expected to grow more quickly. However, Facebook parent Meta Platforms experienced 34 percent revenue growth during the same time period. Of course, Twitter dismal performance is why the prospect of a Musk takeover was appealing. It's a stretch for Twitter to now blame Musk for its poor performance.
Not only on Twitter is it easy to lose sight of the forest for the trees. Investors may also be overreacting to Snap results.
When Snap reported first-quarter earnings in April, it warned that the "macroeconomic environment has deteriorated further and faster than anticipated," and projected 20 percent to 25 percent revenue growth in the second quarter. Snap stock immediately fell 43 percent to just under $13. Following a recent recovery to above $16, the stock dropped more than 35% to just above $10 Friday morning.
According to Bloomberg data, Snap is trading at 3.2 times forward revenue at this price, which puts it in line with Meta Platforms and just ahead of Pinterest. Analysts expect Meta to report flat revenue for the second quarter next week, while Pinterest is expected to report 10% revenue growth. In other words, both companies lag behind Snap in terms of growth, while Pinterest faces more fundamental issues regarding user growth.
Snape can be punished for how he communicates his expectations. In its May statement, the company said it would report revenue "below the low end" of its guidance. Snap's actual results ended up being somewhat where Wall Street predicted they would be. But uncertainty is the name of the game in this environment.
Investor confidence in Snap long-term prospects may also dwindle. In a note this morning, Moffett Nathanson analyst Michael Nathanson said that "there is a risk that Snap will be unable to invest enough to compete with rival platforms, and user growth could begin to falter."
There's clearly a risk to this considering how fickle Snap's younger audience is. But you could also say that companies like Meta, struggling with existential issues like toxic content and competition from TikTok, and Pinterest, whose management is in transition, face more uncertainty. In fact, Snap's second-quarter performance doesn't bode well for what Meta and Pinterest reported for the same period. For Snap, it seems a little early to give up hope in the company long-term growth prospects.
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