Can SNAP Find a Way out of Apple’s Privacy Rules?

SNAP (NYSE: SNAP) is a company that has been through several challenges over the course of its short life. Its most popular product is Snapchat, an application with social functions but it calls itself a camera company.

Analysts have predicted the death knell for the company several times, talking about it as a potential acquisition for Apple (NASDAQ: AAPL) or Alphabet’s (NASDAQ: GOOG)(NASDAQ: GOOGL) Google to just survive. However, the company has generally emerged from these situations each time. Now it is faced with another major headwind.

SNAP reported its numbers for the third quarter of 2021 recently. Its numbers were below analyst expectations, and SNAP stock dropped from $77.34 on October 11 to $49.76 on November 26. That’s a drop of over 34%.

SNAP cut losses but Apple throws a spanner

If this was a normal earnings report, it was unlikely that SNAP would have taken such a hit. The company’s daily active users (DAU) grew 23% compared to the same quarter in 2020 to 306 million.

Apart from North America and Europe, its DAUs were 130 million in its Rest of the World segment. Its average revenue per user (ARPU) was up 28% to $3.49. Total revenue grew by 57% to $1.07 billion. Net losses for Q3 2021 came in at $72 million, down from almost $200 million in Q3 2020.

However, there were a couple of numbers that missed analyst estimates. Analysts predicted revenues at $1.1 billion for the quarter. Further, SNAP projected total revenue of $1.17 billion to $1.21 billion for Q4 2021. This was also lower than the average analysts’ estimate of $1.36 billion.

Why the huge difference? That’s mainly because of Apple’s privacy rules that were changed with respect to ad tracking rolled out in June and July. The new rules make it very tough for companies like SNAP to target ads based on user history.

Over 50% of SNAP’s revenue comes from direct advertising on mobile. SNAP CEO Evan Spiegel said this was a “more significant headwind in the current environment."

Spiegel said, "While we anticipated some degree of business disruption, the new Apple-provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.”

Supply-chain affects social-media platforms as well

Apart from Apple’s new policy changes, another major challenge for SNAP has been the global supply chain bottlenecks. Most of SNAP’s advertising comes from retailers. However, retailers across the world are unable to satisfy customers’ demands because they can’t stock up on inventory.

A shortage of labor in North America doesn’t help SNAP either. This is especially significant because APRU for SNAP in North America is $8.2 compared to $0.98 in the Rest of the World segment.

While the supply chain and labor shortage will likely get resolved in time, few experts expect any solutions in 2021. The challenges from Apple’s policy changes are more serious, and it is unlikely SNAP will find a resolution in the near term.

Snap CFO Derek Andersen admitted as much in an October 21 webcast, “(W)e still expect these headwinds to continue to impact our business throughout Q4 as the adoption of new measurement solutions will take time. It is still not clear what the longer term impact of the iOS platform changes may be, and this may not be clear until at least several months or more after the ecosystem stabilizes and advertisers are able to fully implement the new solutions we are developing.”

From the looks of it, investors would be wise to hold on to their investment plans in SNAP stock for a couple of quarters at least.

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