Snap losing two major executives may be bigger deal than 20% workforce cut, Wall Street says

Most Wall Street analysts covering Snap expected that it would cut its workforce, but not that it would lose two major sales executives. The company will lay off 20% of its workforce, or 1,000 employees, The Verge reported Tuesday. Layoffs will begin on Wednesday. The report also noted that Snap’s top ad executive Jeremi Gorman and its vice president of sales for the Americas, Peter Naylor, are leaving to join Netflix. “We were expecting Snap to take cost-cutting actions following 2Q results and we note press reports suggest Snap could soon announce a 20% reduction-in-force,” Citi analyst Ronald Josey wrote in a Wednesday note. “That said, we were surprised to see Snap’s Chief Business Officer, Jeremi Gorman, and its head of N.A. ad sales, Peter Naylor, leave to join Netflix which we believe could prolong Snap’s ad growth challenges and increase execution risk as Snap builds improved measurement tools and monetization ramps at Spotlight, Camera, Shopping, and Maps.” Citi downgraded shares of the company to neutral/ high risk and lowered its price target to $10 from $16 on the news. Potential cost savings Other analysts were surprised by the number of employees Snap is cutting, even though the company had noted a turnaround plan. “This news may not indicate a departure from the company’s previous narrative of rightsizing the business for the current macro environment,” Benjamin Black, an analyst at Deutsche Bank, wrote in a note. “That said, the magnitude of the cuts is larger than what we had expected and could potentially point to a even more challenging macro environment than previously anticipated, which could have negative read-throughs for all ad exposed names.” The reduction of Snap’s workforce could result in about $400 million to $500 million in savings on an annualized basis related to salary and payroll, which is about 17% to 22% of the company’s total adjusted operating expenses from the last year, Black noted. “Overall, we believe this round of layoffs shouldn’t meaningfully impact the company’s core divisions including AR and advertising,” he said, adding that it’s more aimed at moving away from businesses that were either not garnering meaningful traction or were not strategic, such as hardware. Still, the departure of two senior executives in ads “could hamper Snap’s effort to reinvigorate its ad business, especially in this challenging macro environment,” he said. Deutsche Bank has a hold rating and $14 price target on shares of Snap. Bank of America sees the potential operating expense savings from the workforce cut as slightly smaller, estimating more than $200 million annual savings, suggesting Snap is targeting better margins in 2023, according to analyst Justin Post. The layoffs will likely be disruptive but not unexpected given Snap’s 82% headcount growth since 2020, and its renewed focus should be constructive for 2023, said Post. “While the macro or competitive outlook could deteriorate further in 2H, we believe risk of some sales pressure is priced into the stock, trading at 3.0x Street 2023 revenue estimate (below the pandemic valuation bottom in 2020),” he said. “We see opportunity for revenue acceleration when the economy stabilizes given strong user growth and we maintain Buy as renewed focus on core ad products should be constructive for execution and margins in 2023.” Still, the departure of Gorman and Naylor do pose risk to shares of Snap. Bank of America has a buy rating and $22 price target on the company stock. “Our Take: Ms. Gorman’s potential departure, along with reorganization around layoffs could be disruptive for sales over the next few quarters and would likely be perceived negatively by the Street,” said Post. “Also, Netflix’s high profile advertising exec hires could raise additional competitive concerns for the Online advertising sector.” Snap shares have lost nearly 80% year to date through Tuesday’s close. –CNBC’s Michael Bloom contributed to this report.

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