Snap Inc. shares slipped 34 cents to $5.27 in early trading Thursday, extending recent losses after a brokerage downgrade highlighted persistent challenges in the company's advertising business and ongoing cost pressures. The stock's decline comes despite a modest rebound the prior session, when shares closed up 1.08% at $5.61, snapping a two-day losing streak.
Downgrade Sparks Fresh Skepticism
Freedom Broker cut its rating on Snap to Hold from Buy, citing weak advertising growth and geopolitical headwinds that are weighing on brand budgets. Analyst Saken Ismailov noted that first-quarter results failed to inspire confidence, even as the company reported a 12% revenue increase to $1.53 billion. The downgrade follows Snap's decision to end its partnership with Perplexity, recent staff reductions, and a cautious outlook for the second quarter.
Mixed Q1 Results
Snap's first-quarter earnings revealed a mixed picture. While total revenue grew 12% year-over-year to $1.529 billion, advertising revenue—the company's primary income source—rose just 3% to $1.24 billion. Other revenue, largely from subscriptions, surged 87% to $285.3 million. The company posted a net loss of $89 million, though adjusted EBITDA reached $233 million. CEO Evan Spiegel highlighted a return to growth in daily active users and strong free cash flow.
However, ad pricing power remains weak: ad impressions climbed roughly 17%, but the cost per ad slipped about 12%, indicating that Snap is selling more ads at lower prices. This dynamic reflects intense competition from Meta's Instagram, TikTok, and Pinterest, all of which reported solid revenue growth in the first quarter.
Q2 Outlook Disappoints
Snap's forecast for the second quarter offered little relief. The company expects revenue between $1.52 billion and $1.55 billion, factoring in no contribution from the terminated Perplexity partnership and ongoing uncertainty in its Middle East operations. Adjusted EBITDA guidance of $175 million to $200 million trails the first-quarter result. CFO Derek Andersen noted that the outlook includes a full quarter of Middle East turbulence, though gains in North American ad revenue are providing some cushion.
Cost-Cutting Initiatives
Snap is aggressively cutting costs to shore up its finances. The company plans to reduce its global workforce by approximately 16%, with pretax charges of $95 million to $130 million, mostly in the second quarter. During Q1, Snap also repurchased and retired 49.9 million Class A shares for $350.5 million, leaving $400 million remaining under its buyback program announced in February. The company aims for over $500 million in annualized cost reductions in the second half of 2026.
Competitive Landscape and Risks
Snap faces intense competition from larger rivals like Alphabet, ByteDance, Meta, and Pinterest, which can adapt more quickly to technological shifts and changes in advertiser demand. Smaller ad platforms are particularly vulnerable when advertisers cut budgets and shift spending to industry giants. Additionally, stricter privacy regulations and changes in mobile operating systems have complicated ad targeting and measurement, potentially steering advertisers toward larger platforms.
Snap's latest 10-Q filing warns that most advertisers have not committed to long-term deals, leaving the company exposed to sudden pullbacks in spending, lackluster ad performance, or regulatory changes. The company's accumulated deficit now stands at $14.4 billion, underscoring the financial challenges ahead.
Market Reaction
Thursday's decline underscores Wall Street's cautious stance on Snap. Investors are weighing the potential of new revenue streams—such as subscriptions, AI-driven ads, and hardware like Spectacles—against the reality of a sluggish ad business and ongoing cost pressures. As the company navigates a tough competitive landscape, the market is giving it little room for error.
