Key fixes Snap needs to make to bounce back: Analyst

Snap Inc. (SNAP) is the latest company to announce layoffs, saying it will cut 10% of its global staff. The company plans to use the capital to invest in long-term growth plans. With stiff competition for ad revenue from Meta (META) and Pinterest (PINS) what must Snap do in order to succeed?

Roth MKM Managing Director Rohit Kulkarni joins Yahoo Finance to discuss the company's performance, as well as what the company needs to fix in order to achieve some of those long-term growth plans and better engage with its competition.

In terms of competition, Kulkarni explains that "What Facebook has done since, say, late '21, all of '22, and half of '23, they have invested in AI in a way that they can recover some of the lost signals from all of the changes that Apple and all the privacy changes that have been happening in the ecosystem. I would put it that Facebook is probably maybe 6, 9, 12 months ahead of a company like Snap when it comes to fixing what was broken because of Apple and ecosystem changes... Snap is facing its own issues. They're losing a lot of executives. They are losing some key people on the team, and while that is happening, they're falling a little bit behind on they're kind of quest to become a direct response."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Snap, the latest tech company to announce job cuts. The social media giant saying it will cut 10% of its global headcount to free up capital to invest in its long-term growth plans. This comes just ahead of the company's fourth quarter results tomorrow. Shares are edging lower this morning. Joining us now, we've got Rohit Kulkarni who is the Roth MKM Managing Director here. Rohit, what is this set up for what the company will say once they do release earnings?

ROHIT KULKARNI: Hey, thanks for having me. And I would say that expectations for Snap have been rising given what Facebook, Amazon, Google told us last week. Again, advertising remains strong. I think expectations have been going up, while Snap's remains in somewhat of a slow recovery mode, I would just put it that way, that they are trying to recover from all the changes that Apple inflicted plus their loss in executives during all of '23. And now, they are losing more employees.

So I think it's still is a prolonged turnaround story, in my opinion, and I think we remain cautious heading into earnings tomorrow given expectations are going higher, and they're cutting off employees doesn't bode a kind of encouraging sign for the demand curve that they may be seeing right now. That's the only time you would probably cut employees at 10% or more.

SEANA SMITH: Rohit, so comparing Meta to Snap, and I realize it's not an apples-to-apples comparison, but I bring this up because of what we heard from Meta last week-- the ad recovery story, clearly the driver there, and the results and also the reaction that we saw post-results. When you compare what's happening at Meta to what's happening or not happening at Snap, what do you think Snap needs to do in order to better benefit from the recovery in the ad space that we are seeing play out in some of their competitors?

ROHIT KULKARNI: I hate to play this buzzword bingo with you guys, but it's AI. I think what Facebook has done since, say late '21, all of '22, and half of '23, they have invested in AI in a way that they can recover some of the lost signals from all the changes that Apple and all the privacy changes have been happening in the ecosystem. So I would put it that Facebook is probably maybe six, nine, 12 months ahead of a company like Snap when it comes to fixing what was broken because of Apple and ecosystem changes.

In the meanwhile, Snap is facing its own issues. They are losing a lot of executives. They are losing some key people on the team. And while that is happening, they're falling a little bit behind on their quest to become a direct response, which is kind of the bottom of funnel real secret sauce large addressable market advertising play, so probably give them six, nine months in my opinion, if they can fix it, they'll be able to fix it in that time

BRAD SMITH: So does that mean that Facebook or Meta and how they're operating right now, are they more of perhaps a social media anomaly and just the size that they are, the scale that they have as well, and the amount of advertising dollars that flow into them versus some of the other social media and digital advertising plays out there?

ROHIT KULKARNI: I think so. I think Facebook is out executing absolutely everybody else in the ecosystem. Facebook probably lost a lot of market share during 2021 and '22, and they are showing that they can regain most of that lost market share and plus probability of getting more market share because of the way they're executing, the way they're investing in AI, and they're investing in services that could be monetized at a much higher rate. So again, Facebook is gaining share, and that's why they're putting up the numbers that they are doing.

Ad market has recovered but not completely recovered in a way that we are in the hunky dory days of back in '21. So probably, we are somewhere in between. And that's where smaller companies like Snap continue to hurt as they see some volatility in some of their customers.