Snap Inc's profit warning sends ripples through social media stocks

  • Reuters
  • Stock Market News
Snap Inc's profit warning sends ripples through social media stocks
Credit: © Reuters.

(Reuters) - Snap Inc (NYSE: SNAP )'s shares slumped 30% before the bell on Tuesday after a profit warning from the social media company signaled tough times ahead for the once-booming industry, sparking a sector-wide selloff.

The owner of Snapchat was on course erase about $10 billion from its market value, while larger players Meta Platforms and Google-parent Alphabet (NASDAQ: GOOGL ) Inc were both down more than 4%.

Snap said on Monday it expected to miss quarterly revenue and profits targets that it set just a month earlier, citing a faster-than-expected downturn in the economy.

Like companies across sectors, Snap faces pressure from inflation, labor shortages and rising interest rates that have raised fears of a global economic slowdown.

"This suggests that in just a month, the environment has aggressively deteriorated further. We see no real reason to not take Snap's negative pre-release at face value," Evercore ISI analyst Mark Mahaney said.

While the weakening economy is the main factor, competition from TikTok and a shift in ad budgets to Google and Facebook (NASDAQ: FB ) are also hurting the company, he added.

Analysts also said Snap's outlook for core profit suggested expenses will outpace revenue growth in the period, given headcount was up 52% in the prior quarter.

While demand for online advertising picked up during the pandemic when consumers spent more time on social media, changes to Apple (NASDAQ: AAPL )'s iOS operating system have dulled the industry's growth prospects .

© Reuters. FILE PHOTO: A woman stands in front of the logo of Snap Inc on the floor of the New York Stock Exchange (NYSE) in New York City, NY, U.S. March 2, 2017. REUTERS/Lucas Jackson

The warning from Snap also weighed on the wider market, with futures tracking Nasdaq 100 index down nearly 2%. [.N]

A Bank of America (NYSE: BAC ) fund managers survey for May indicated investors are becoming increasingly bearish on tech stocks, a stark reversal to a bullish trend in the past 14 years. Allocation to tech has also dropped month over month by 23 percentage points, according to the survey.

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