Snap stock (NYSE: SNAP) stock rose over 3% yesterday and has outperformed the markets over the last couple of weeks. Growing scrutiny of TikTok in the US and Snap’s new AR enterprise solution has been driving the stock higher.
Yesterday, Snap announced a new business segment called AR Enterprise Services (ARES) which would sell its AR technology to business customers.
In its release, Snap said, “Through this offering, consumers will enjoy immersive and personalized experiences with their favorite brands, with a suite of advanced tools designed to increase confidence in their purchases.”
Snap launches new AR business
Snap said that Goodr, Gobi Cashmere, and Princess Polly are among the first group of customers of ARES. The new tool would help retailers better connect with buyers as potential buyers can try products from their own premises. It would not only help retailers increase their sales but also potentially lower the return rates.
In her prepared remarks, Jill Popelka, Head of AR Enterprise Services of Snap said “Over the last decade, we’ve been hard at work bringing fun and personal AR experiences to Snapchatters. In the next decade, we’re excited to take our world-class AR technology to businesses’ websites, apps, and even into their physical locations.”
She added, “We look forward to making the shopping experience more delightful for consumers and transforming businesses around the world with AR Enterprise Services.”
TikTok Scrutiny Rises in the US
On the macro level, TikTok is facing intense scrutiny in the US and for a change, there is almost bipartisan support for the cause. US lawmakers are grilling TikTok’s CEO Shou Zi Chew for the company’s ties to the Chinese government.
President Biden has the power to ban TikTok on national security grounds. Many countries have already banned TikTok on state devices and India, which was once the largest market for the company banned the app altogether in 2020 after border clashes with China.
On its part, TikTok has said multiple times that it is not a national security threat and does not share any data with the Chinese government. However, not many buy the argument that Chinese companies can resist the pressure to share data with China if asked to do so.
TikTok has taken away market share from US companies
TikTok emerged as a major challenge to not only Snap but also Facebook and Alphabet’s YouTube. Facebook-parent Meta Platforms reported its first annual fall in revenues last year.
While Apple iPhone privacy rules and a general slowdown in digital ad spending were the key drivers, competition from TikTok also played a part. YouTube’s revenues also fell YoY in the second half of 2022 and even Google’s advertising revenues fell YoY in the fourth quarter of 2022.
Snap disappointed markets with its Q4 earnings
Snap posted revenues of $1.30 billion in the fourth quarter of 2022 which was slightly below the $1.31 billion that markets were expecting. The company’s revenues were similar to the corresponding quarter last year.
It was nonetheless the slowest pace of rise since the company went public in 2017. Snap’s revenue growth had previously stalled to an all-time low of 6% in Q3 2022. In the full year, the company’s revenues increased 12% to $4.6 billion.
To put that in perspective, Snap’s revenues rose 64.2% in 2021. In the preceding three years, the company’s revenues rose by over 40% every year.
Snap guided for lower revenues in the first quarter
Snap posted an adjusted EPS of 14 cents in Q4 2022 which was ahead of the 11 cents that markets were expecting. However, the earnings beat was more than overshadowed by the tepid guidance.
The company said that its “internal forecasts” suggest a revenue decline between 2-10% in the first quarter. The guidance fell well short of analysts’ estimates. Wall Street analysts were expecting the company’s Q1 2023 to be slightly higher YoY.
During the earnings call, Snap co-founder and Chief Executive Evan Spiegel said, “From our recent conversations with our partners, it seems like advertising demand hasn’t really improved, but it hasn’t gotten significantly worse either.”
Snap is working on improving its profitability
Snap’s investor letter stated, “We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital.”
In its investor letter, Snap said, “Despite a challenging macroeconomic environment, we believe that we have a clear path to generating meaningful adjusted EBITDA profitability and positive free cash flow even at low rates of revenue growth.”
The company has also announced layoffs to align its workforce with the macroeconomic realities. Meta Platforms has also announced two rounds of layoffs as the Facebook parent faces shareholder ire over spiraling costs.
Social media stocks have rebounded
Social media stocks have rebounded in 2023 after a dismal 2022 where Meta Platforms lost over 65% and was the worst-performing FAANG stock. Looking at the YTD price action, while Snap stock is up over 28%, Meta Platforms is up 66% and is among the top three S&P 500 gainers.
If the US bans TikTok, whose probability looks quite low, it would be a positive for companies like Snap and Meta Platforms. However, the move would further ignite tensions between the US and China.
Relations between the world’s two largest economies are already running at multi-decade lows and a TikTok ban would only escalate the tensions.