What Snapchat’s Layoffs Mean For Investors

Key takeaways

• Snap plans to lay off around 20% of its global workforce, or nearly 1,300 out of 6,400 employees
• Snap will also cancel some in-house projects to limit liabilities and streamline workflows
• The social media app’s stock price has plunged over 75% YTD, but gained nearly 7% after its CEO confirmed Snap layoff plans

According to a report from The Verge – and confirmed by CEO Evan Spiegel – Snapchat parent Snap plans to lay off around 20% of its workforce. That accounts for close to 1,300 staffers out of 6,400 on the global payroll.

Amid the Snap layoff, the company plans to shutter multiple projects and restructure its business to streamline operations.

As stubborn inflation, rising interest rates and supply chain issues persist, Snap is just one of dozens of tech giants to institute severe cost-cutting measures like hiring freezes and layoffs. However, Snap may be one of a few whose investors responded positively to the news soon after its announcement.

Snap layoff plans, summarized

Snap has reportedly been strategizing its layoffs for several weeks.

In a public memo, CEO Spiegel reported that Snap’s revenue is just starting to rebound after sitting flat in July. However, the company remains far below its 40%+ revenue seen prior to an industry-wide contraction in digital advertising revenue.

To counteract its financial shrinkage, Spiegel wrote that Snap is “restructuring our business to increased focus on our three strategic priorities: community growth, revenue growth and augmented reality.”

In an SEC regulatory filing, Snap reported that it expects layoffs to save some $500 million annually.

Slashing products

But the Snap layoff isn’t the company’s only plan to trim deadweight and stem the hemorrhage.

The company also plans to slash or “wind down” at least six products, including Zenly, a social mapping app and the TikTok-style music creation app Voisey. Some of its hardware will be canceled, too, including its self-flying drone and AR glasses.

The Snapchat app itself will pare down to meet the company’s new goals. For instance, Snap will discontinue future shows on Discover, its in-app short show channel. And several out-of-house developer projects, including mini apps and games, are likely to be severely impacted.

Staring down a corporate restructure

Alongside these cuts, Snap plans to appoint its first chief operating officer in seven years. Jerry Hunter, a senior vice president for engineering, will elevate to the company’s No. 2 position.

The company’s ad sales division will also restructure after Snap’s chief business officer Jeremi Gorman leaves to work for Netflix.

Snap’s online memo further notes that: “We are also realigning our regional operational leadership by creating a new President role in each of the Americas, EMEA and APAC regions.”

Why the Snap layoffs?

Though the scale of Snap’s layoff is substantial – one-fifth of your workforce is nothing to sneeze at – it’s not exactly a surprise.

Like many of its tech peers, Snap hired aggressively during the pandemic, nearly doubling its workforce between March 2020 and last quarter. Its user base soared to about 347 million daily users. Snap also made its largest-ever acquisition in May 2021 when it dropped over $500 million on WaveOptics, which supplied its AR displays.

Unfortunately, Snap’s success has also been stunted.

For instance, despite its enormous user base, Snap has only turned a profit once since its 2017 IPO. Apple’s industry-bashing privacy changes also gutted Snap’s advertising revenues since last year. And, as advertisers cracked down on their budgets last spring, those effects rippled into Snap’s profits.

Back in May, management noted that it would have to slow hiring and start cutting costs as advertisers pulled their revenue. Soon thereafter, it delivered abysmal Q2 earnings and refused to forecast Q3 results. At one point over the summer, Snap shares tumbled 25% when it warned investors that the economy worsened faster than expected.

In a Wednesday email to employees, Snap’s CEO blamed the overarching macroeconomic environment for forcing his decision.

And in its online memo, Snap further expounded that the “investments we have made in our business to-date assumed a higher rate of revenue growth…. Unfortunately, given our current lower rate of revenue growth, it has become clear that we must reduce our cost structure to avoid incurring significant ongoing losses. While we have built substantial capital reserves and have made extensive efforts to avoid reductions in the size of our team…we must now face the consequences of our lower revenue growth and adapt to the market environment.”

Part of a broader trend

Snap isn’t alone in its layoff strategy. Multiple high-flying tech companies kicked off their layoff strategies this last spring, including:

• Wayfair, which has slashed nearly 900 jobs
• Peloton, which has fired over 4,150 employees this year
• Groupon, which has cut some 15% of its workforce, or 500 employees
• Robinhood, which has gutted around 23% of its staff
• Shopify, which laid off around 1,000 workers – 10% of its workforce – in June
• Coinbase, which told employees in June that it would reduce headcount by 18%

Each of these companies shares a common thread: when the pandemic profits kicked in, they were there to scoop up opportunities and scale as aggressively as possible. Then, when profits slowed, inflation soared and the Fed kicked up interest rates, they compensated by slashing budgets wherever possible.

Unfortunately, that led many to cut their workforces as they readjusted their strategies. According to estimates by Crunchbase, over 30,000 U.S. tech workers have been laid off in the last few months.

What the Snap layoff means for investors

Broadly speaking, tech stocks don’t fare well when uncertainty runs high, interest rates rise and prices soar. During times like these, consumers turn to saving instead of spending, which drives down corporate profits. Meanwhile, investors may turn to less risky stocks or even alternative asset classes to fill out their portfolios.

But there’s something special about social media companies in particular.

As advertisers reduced their spend amid higher prices, rising interest rates, the Russia-Ukraine war and the prospect of an upcoming recession, companies that rely on advertising dollars saw their bottom lines plunge.

Many also blamed Apple’s privacy update, which allowed consumers to heavily limit where and when advertisers could track their digital activities.

As a result, Snap shares plunged over 25% after reporting its Q2 earnings in mid-July. At the time, the company also declined to provide current quarter guidance due to “incredibly challenging” forward-looking visibility.

Overall, Snap shares have shed more than 75% this year following the tech crunch and its own earnings reports. But, perhaps surprisingly, Snap popped as high as 15% after the firm confirmed reports it planned to slash 20% of its workforce, ending up almost 7% on Thursday.

These results suggest that while Snap’s year has given investors pause, the fact that management is seriously readjusting its strategy for the modern environment – and making hard decisions to do so – bodes well for its future.

Don’t let the Snap layoff bring you down

If there’s a lesson to be learned from the tech rally and ensuing crunch, it’s that the short-term approach isn’t always the wisest.

Sure, Snap made some rapid progress and doubled its workforce in two years. But in scaling aggressively, management failed to consider whether the tech boom would actually last – and now, it’s dropping a fifth of its workforce.

For Snap – and a multitude of companies like it – taking a longer-term approached may have saved hundreds of millions of dollars (and a massive headache). Not to mention, the company’s stock may have escaped some of the grueling punishment investors meted out over the last nine months.

Of course, you’re probably not a multi-national corporation. But you can learn from big companies’ mistakes by taking the long, proven approach in your own finances. Time and again, research shows that a slow-and-steady investing strategy produces some of the best long-term gains.

And Q.ai can help you stick to what works. With our wide variety of Investment Kits – from the Tech Rally Kit to capitalize on companies like Snap, to the Clean Tech Kit to invest in the long-term future – we can help your goals become reality.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.