Snapchat, the canary in the mine of social networks

Hundreds of billions of dollars have evaporated on the stock market in two days, since the management of Snap, parent company of the social network Snapchat, issued the warning that the coming quarters would be more difficult than expected. Investors fear that the turbulence experienced by Snapchat will spread to other digital platforms, including Facebook (Meta), Twitter and Google (Alphabet).

Snap had its worst day since its IPO five years ago on Tuesday, losing half its value in just hours. By unveiling its quarterly results barely a month ago, the management of the American company had nevertheless revealed that it had achieved its objectives and met analysts’ expectations.

A rapidly deteriorating market

But here it is: the digital advertising market has deteriorated rapidly in recent weeks, enough for Snap to warn markets that its guidance for the current quarter no longer holds water.

“Like many other businesses, we are experiencing rising inflation and interest rates, labor supply and market turbulence, legislative changes affecting digital platforms, effects of the war in Ukraine and more,” Snap CEO Evan Spiegel said in an internal memo picked up by US media.

These macroeconomic factors are already known, but have hit the technology sector the hardest since the start of the year, which is generally more volatile in the face of economic fluctuations.

Faced with rising costs and falling revenues, companies are forced to cut spending. Buying advertising on social media and other digital platforms usually happens quite early in this process.

A hasty end to the chapter

What Snap seems to have confirmed on Tuesday is that this downturn in spending in the digital advertising market has already begun.

It’s not just social media companies that are affected. These are all Internet companies whose business model is based on the sale of advertising. Internet video service Roku has seen its stock lose 14% of its value in recent days. However, all is not so bad in the digital economy.

Snap forecast for the current three-month period revenue growth of 20% to 25% compared to the same quarter a year ago. Instead, its revision points to growth that will “probably be below the lower end of this range”.

It is therefore the end of a period of growth that was exacerbated by two years of a pandemic that gave pride of place to digital technologies.

This impression is reinforced by the results, also disappointing, presented in recent weeks by other technology companies such as Meta and Netflix, where it is rather the number of new subscribers that is beginning to level off.

All the analysts who judged the techno companies too generously valued on the stock market in recent months are seeing their reading of the situation confirmed these days.

In fact, the excess of enthusiasm of the investors seems to have reversed quickly, indicated at the beginning of the week in a note to its customers the firm Mizuho.

“Investor sentiment is now absurdly weak. […]. One wonders if there are still stocks to sell in the techno sectors” by disappointed shareholders.

After a few months of a bearish trend in technology stocks tracked by the Nasdaq stock market index, even optimistic observers are discouraging investors from buying these stocks for the moment.

At UBS, for example, it is recommended to diversify portfolios to prevent too much exposure to the volatility of this sector.

An inevitable recession

The next few months are likely to support this trend, as the main central banks will raise their interest rates to prevent the global economy from falling into a recession that seems increasingly inevitable.

Never in recent decades has a rise in energy prices like the one the planet has been experiencing for the past three months ended otherwise than in an economic contraction.

In the United States, the Federal Reserve still continues to believe in it. A careful adjustment of rates, she said, would allow a soft landing for the American economy while waiting for a recovery somewhere around mid-2023.

This is not the scenario that we see at the moment in techno.

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