Tech earnings: ‘This could get a lot darker than we all think,’ analyst warns

Jefferies Sr. Research Analyst Brent Thill joins Yahoo Finance Live to discuss the decline in stock for Snap amid quarterly earnings, fourth-quarter guidance, tech earnings, and the outlook for the social media platform.

Video Transcript

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BRAD SMITH: So for more on this move that we've been tracking with Snap-- as I put that back in focus on the day, down 30%-- we've got Jefferies' Senior Research Analyst Brent Thill. Brent, just take us into your reaction after you saw the numbers cross from Snap and what the executives had to say on the call last night.

BRENT THILL: Yeah, good morning. The quarter itself was OK. It was the guide. And they have obviously been experiencing decelerating growth. Just over a year ago, they said they could grow indefinitely for 50%, and then the growth rate came into the 30s, into the teens, into the single digits.

And they exited at high single-digit growth, and then said the quarter was growing at 9%, and then said the quarter would end flat because advertisers would fall off a cliff in the back half of the quarter. So I think it's more about the guide, more about the lack of visibility.

There's clearly been a lot of departures. Their senior leaders and sales have left to go to Netflix. You have a concern around advertisers moving to where the wallets are, meaning the younger audience on Snap don't have the dollars. The parents have the dollars. The older generation has the dollars. So you're seeing advertisers shift up from the lower end to the higher end, which makes sense.

So we're still going to be influenced to buy household goods and items for-- to run our life, but that's not where we make the decisions on Snap, right? We may make a decision on Snap to buy the new Hawaiian shirt or buy a concert ticket, but we're not going to be influenced to go, again, make some of the bigger ticket purchases. So dollars for advertisers are shifting to Google, to Amazon, to proven spend where the wallets are, and that's where the advertisers are at.

We also have a competitive issue with TikTok, which is anyone that's fired up TikTok and spent five minutes with it, spends a half hour with it, it engages you. It brings you in. So advertisers naturally, in their more experimental younger audience, are shifting away from Snap over to the TikTok platform. So there's a handful of forces, changes in the team, changes in advertisers.

I think, overall, the bigger picture too is the macro, which is we have a macro picture that's dimming. We are going into a recession in '23 per our economists. This will start later than most economists have believed. Our team internally continues to believe that we are going to go into more of a tailspin in next year, that this takes time to come out into the economy.

So if you think about that, if we do go into that tailspin, we-- advertisers naturally, the first thing they're going to say is we're not spending, right? Advertising can be tuned up and tuned down in a nanosecond. We describe it as the stereo knob in your car or at home. You can go up and down really quick.

You can't do that in software. You can't do that in semis. You can't do that in other areas of technology. So right now, I think investors are just, like, I don't want to be in advertising if we're going into a prolonged downturn. I will be back to advertising names when we go back in the upturn.

And there's safer names outside of tech, and that's what we continue to hear from our clients is just our clients want to be outside of technology right now. They want to be in energy. If you look at the XLE, up over 50% year-to-date, right? So the popular trade at the beginning of the year was short technology, be long the XLE.

And we've got the XLE up again today, now up 54% year-to-date. So I don't think that the tone of technology overall in advertising in many of the other tech names that we cover is going to shift until we get into 2023 and we get a lot of these companies to really reset the numbers. So I expect a tougher-- a tougher earnings season for the rest of tech.

BRIAN SOZZI: Brent, does Snap have to cut its expenses even further?

BRENT THILL: Yes. I mean, they do. I mean, they just restructured the company. They obviously are in the process of still reducing the workforce by 20%. They may have to go deeper. And, again, I think the thing we don't know is how long is this economic pullback going to last. It could last all next year.

Again, our Jefferies' own economists have said this really starts later in the year versus early because it takes time for all these changes that the Fed is putting into place is going to be a wave that comes in slowly. It doesn't come crashing in on you. And so the scary part of what-- what's happening is we don't know exactly that this can be prolonged.

A lot of companies are saying, oh, we're not seeing it. Some companies are saying we're seeing it. I think everyone's going to see it. And I think this is going to be, again, the concern, which is this could get a lot darker than we all think. And that is a potential.

Now, I would highlight that, look, if Elon Musk thinks that Twitter is worth $44 billion, and Snap now has a roughly $12 billion market cap, you start to ask yourself-- he's trying to build the X app, which is all these things you can do. Snap has a closer version of an X app than anyone. It has the Map. It has the information page. It has a messaging service. It has AR, VR. It has a gaming interface.

I mean, there's many elements that investors have come back to me and said, well, Brent, if he wants to create an X app, which is all these things that Twitter isn't today and fire 75% of the workforce, doesn't Snap have all the foundational makings of what an X app would look like? And I'm, like, yeah, absolutely. So at some point, you kind of go, look, we understand they've had execution issues, again, the visibility in the advertising industry. That's across the board.

I mean, this-- it's not like Meta and Google and Amazon's ad business are accelerating. They're all decelerating, right? So they're all facing the same headwinds. Now, obviously, Snap's had stronger headwinds. But at some point you go back to everyone is so negative that ultimately if you have a long-term horizon and you sit and look at this and you believe-- you know, these are typically some of the best opportunities for tech investors over a three-year period, not the next three months.

So depending on your duration, I think there's some incredible opportunities that are being born in this downturn that clearly we're going to have some hazy, overcast, foggy skies in the short term. But you're getting some interesting opportunities if you are a longer-term investor.

BRAD SMITH: Do you think there's some consolidation to be expected given the valuations right now?

BRENT THILL: 100%. M&A is going to massively spike. M&A-- there is no IPO window right now. So we have given birth to a lot of great technology companies. Many of these subsectors are overcrowded. You've already seen that year-to-date.

Thoma Bravo, who's one of the best software investors on the planet, has spent over $20 billion acquiring multiple companies outside in the security and technology landscape. So if you look even outside of social media, you've seen incredible consolidation. You've seen strategic deals like Adobe buying Figma for $20 billion. No one thought any company in the beginning of a recession would pay 50 times revenue, 5-0, not 5, 50.

So we are going to see an incredible amount of strategic M&A, an incredible amount of private equity-led M&A. You're already seeing it. You're seeing the numbers skyrocket year-to-date. You're seeing some of the best technology investors for the long haul like Thoma Bravo say this is go time for software consolidation. There's no question.

And this is what we need to restore the health because we're in that cycle of we expanded dramatically. We had so many IPOs. We've had no IPOs in tech this year. And so if you think about what's happening, you're going to go back to that natural consolidation phase of M&A.

And we firmly believe we're seeing the signals. Already, we're seeing the best investors in the space talk about it. We're seeing the strategics step up and make acquisitions. You saw Adobe. You saw Microsoft and Activision. You've seen Salesforce go a little quiet. They have to go quiet in the short term.

Intuit did Mailchimp for $12 billion. You've seen-- you've seen an incredible amount. And so I think, ultimately, these valuations are going to get cheaper. This is when you want to be acquiring if you're a strategic [INAUDIBLE] private equity.

BRIAN SOZZI: Great perspective, as always. Jefferies' Senior Research Analyst Brent Thill. Have a great weekend. We'll talk to you soon.

BRENT THILL: You, too.