Why Snap is Struggling in the Online Ad Market

The online ad market is experiencing a rebound, but the spoils are not evenly shared among all companies. While Meta, the parent company of Facebook and Instagram, reported impressive growth in its ad business, smaller rival Snap fell short of expectations. Meta’s ad business grew 24% from the previous year, marking its fastest rate of expansion since mid-2021. In contrast, Snap reported only a 5% increase in ad revenue, marking its sixth consecutive quarter of single-digit growth or sales decline. This places Snap behind advertising giants like Google, Amazon, Microsoft, and Meta. As a result, investors have reacted negatively, causing Snap’s stock to drop by 33% during extended trading. It is clear that Snap is headed for one of its worst days on the market since its debut seven years ago.

Slow Recovery for Snap

While larger companies like Meta are enjoying rapid growth, smaller companies like Snap are struggling to rebound. According to Jasmine Enberg, a principal analyst at Insider Intelligence, “we’re seeing the bigger companies get bigger and smaller companies are slower to rebound.” Snap falls into the latter category. Despite projecting revenue growth of 11% to 15% for the first quarter, Snap’s estimate fell just below analysts’ average expectations. This highlights the uneven nature of the ad market recovery.

The digital ad market as a whole is recovering from a challenging 2022. Brands were hesitant to spend on advertising due to soaring inflation and rising interest rates. However, the market is now experiencing improvements thanks to a more stable economy and upcoming events like the 2024 Olympics in Paris and the presidential election. Advertising giants like Alphabet, Amazon, and Meta have reported double-digit growth in ad revenue for the fourth quarter. These companies have benefited significantly from the uneven rebound.

During Snap’s earnings call, CEO Evan Spiegel faced questions about why the company is lagging behind its competitors. Rich Greenfield of LightShed Partners raised concerns about whether Snap’s smaller size compared to Meta represents a “fundamental long-term issue.” In response, Spiegel emphasized that Snap is “certainly one of the largest Internet services” and expressed confidence in the company’s growth potential. However, analysts like Ross Sandler from Barclays pushed back, wanting to understand why Snap is not making more progress in catching up with the broader digital ad industry. Spiegel acknowledged some level of disappointment and expressed a desire for faster progress.

Both Meta and Snap faced significant challenges in 2022 due to a weakening ad market and Apple’s iOS privacy update. These factors made it harder for social media companies to target users effectively. In response, both Meta and Snap have been investing in rebuilding their ad technology and leveraging artificial intelligence. Meta’s efforts have paid off, with a surge in spending from Chinese retailers seeking to reach the company’s billions of users worldwide. In comparison, Snap is still in the process of catching up. Despite making progress and investing heavily in machine learning and AI technologies, Snap’s smaller size and slower development timeline have put it at a disadvantage.

Narrowing Focus and Subscription Service

To stand out in the social media universe, Snap has been attempting to position itself more as a messaging company rather than a traditional social media platform. The company disclosed sales figures for its Snapchat+ subscription service, reporting an annualized revenue run rate of $249 million in 2023. The subscription service has grown from 5 million to 7 million subscribers in the previous quarter. While this shows some promise, advertising remains the primary revenue driver. Snap is still competing for the same social ad dollars as its counterparts, and investor confidence in its ability to succeed in this space is waning.

Overall, the market’s lack of confidence in Snap’s ability to compete with larger players is concerning. The company’s slower recovery, smaller size, and delayed progress have raised doubts about its future in the online ad market. Despite investing in technologies and demonstrating some growth in its subscription service, Snap is struggling to keep up with the giants of the industry. The road ahead for Snap will require significant effort and innovation to establish itself as a strong contender in the digital advertising space.

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