👻📸 The Epic Rise and Fall of Snapchat
Hey all! Welcome back to Sunday edition of Hump Days!
Over the last week in tech, we saw:
Broadcom agrees to purchase VMware for $61 billion (Bloomberg)
Luna Token Relaunch?? (Bloomberg)
OnlyFans founder makes crypto debut selling influencer trading cards (Tech Crunch)
VC Firm, Andreessen Horowitz raises $4.5 billion crypto fund (CNBC)
Is Snapchat Dead?
On May 23rd, SNAP filed a surprising disclosure with the SEC stating that its Q2 revenue and EBITDA would be lower than previously expected.
What spooked investors even more was this line…
“Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated.” - SNAP 8-K Filing
This one sentence caused a massive ripple effect across the entire ad industry…
Typically, when business in the advertising business slows, it could be an early indicator that growth in the economy is slowing.
So is the selloff across the entire industry justified?
Not quite. In reality, it’s more nuanced than that.
Within the ad industry, there are generally two main styles of advertising: direct-response and brand awareness.
The goal of direct-response advertising is to get results now, meaning that the goal of the ad is to get people to take immediate action.
On the other hand, the goal of brand marketing is to get your target audience exposed to your company so they remember your brand later on when making a purchase.
So which companies focus on direct-response vs. brand awareness?
Companies will typically place their ads on Facebook and Google for direct-response, while Snapchat and Twitter are typically used for brand awareness campaigns.
In a hypothetical recession, it’s more likely that companies will mainly reduce spending on brand awareness campaign spend compared to direct-response advertising spend.
Thus, Snapchat experiencing a slowdown doesn’t directly imply that Facebook and Google will also experience a slowdown of similar magnitude.
So is Snapchat a buy on the dip?
I’ve spoken to several avid Snapchat users who say that they actually rarely see any ads despite using the app multiple times per day.
While this is merely anecdotal, it does raise the question of how effective and strategic the placement of ads on Snapchat really are.
On the other hand, Snap is at a relatively strong position, reaching more than 70% of 13-34 year olds in countries that collectively comprise over half of the world’s digital ad spend.
With digital advertising only getting bigger, if you’re investing in advertising companies for the long term, this recent decline could potentially be an interesting time to enter positions.
To read more about Snapchat and the state of the advertising industry, check these out:
Snap’s gloomy forecast prompts debate over trouble for broader advertising market (WSJ)
Snap plunges, and there goes social media’s online ad biz (WSJ)
Charts of the Week: The State of Private Equity
Even after a record 2021, private equity deals have stayed strong in 2022. In Q1 2022, the total deal value of U.S. private equity transactions reached ~$330bn, which is on pace to break last year’s record of $880bn.
However, with global dry powder at its lowest ever relative to AUM, it is possible we could see a slow down in private equity deals.
On the contrary, since valuations have come down so much in the past 6 months, some bigger private equity firms could be taking advantage of this to invest more capital at a cheaper price.