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Apple’s privacy initiatives ‘created a big challenge’ for Snap, Facebook: Analyst

Wedbush Securities Analyst Ygal Arounian joins Yahoo Finance Live to discuss Big Tech underperforming, the stock market falling as investors await this week's Fed policy-setting meeting, and the outlook for the digital advertising as Apple's privacy changes affect Snapchat, Facebook, and Pinterest.

Video transcript

BRIAN SOZZI: All right, switching gears, many pros are telling us there is a panic well underway in tech stocks, made worse by a sub-par first-quarter outlook from Netflix last week. The NASDAQ composite is down about 14% or so on the year but momentum names like Affirm are down even more. In the case of Affirm, the stock has plunged 45% so far in January. Really a stunning move there.

Let's welcome in Wedbush Securities tech analyst Ygal Arounian for more on this tech wreck. Ygal, nice to see you as always here. Now you have a broad coverage list in tech, Meta Snap, you name it. What is the appetite by your clients to step in here and buy this tech weakness?

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YGAL AROUNIAN: Hey, thanks, for having me. I mean, so far, the appetite has not been that strong. You know, what we've seen is a real major pullback in valuations. And the names that are the most expensive even still, names that are maybe more capital intensive, are negative free cash flow, have a longer growth runway, meaning a lot more of the growth is further out in the future. Those are the names that have been hit the hardest.

Certainly, there are people digging around, looking at valuations, names that have been hit too hard, valuations that might be trading you know, at troughs historically, trying to maybe position or get more active. But the appetite to really step in and get fully active right now, I think people are waiting a little bit longer to see how things shake out or for the market to kind of settle down before they do that.

JULIE HYMAN: Ygal, I know it's tough to sort of generalize because as Brian said, you have a pretty broad coverage universe within tech but how much is-- are higher rates going to be a threat to technology when all is said and done? Obviously, the perception is there, that they're a big threat, how much do you think they will be in reality?

YGAL AROUNIAN: That's the golden question right now. And you know, really the answer is, it depends. We're still at historically low rates. Going back a couple of years, this level of you know, of rate is still very attractive still-- you could still consider it kind of easy money. The problem is the Fed is tightening, rates have-- the 10-year yield has started to move up quite materially, it just broke above 1.8%. Again, still very low historically.

So I think part of what-- part of what's spooking investors and people a little bit more right now is the inflation that's behind that. And we need to get an answer on inflation it seems like before people can get comfortable with where rates will ultimately settle out. And if the Fed's going to raise rates seven or eight times over the next couple of years, that's going to put some real pressure on the 10-year yield, it's going to put pressure on borrowing costs. And that-- and then when you kind of lookout at your 10-year growth and you're discounting back your cash flows, that impacts valuation.

So right now, it's about the pace of it. And we have some real inflation behind those numbers, which makes it hard to really fully get a feel for where things are going to go. And I think that's been part of the problem with why it's been so hard for things to settle down here right now in the near term.

BRIAN SOZZI: And Ygal, really during this volatile period in tech, I think a lot of investors have forgotten there are company-specific factors really with any companies and names you're trying to predict or buy, invest in, or sell here. And you highlighted this week, you downgraded Snap, I would argue on some specific-- some company-specific factors like privacy. Take us through that call.

YGAL AROUNIAN: Yeah, for sure. First, I think I'd just also highlight the-- you know, the consumer confidence topic leading into this is a huge factor also. I mean, part of what we're seeing here is you know, rates rising but also concerns about slowing growth in the economy, right? How the consumer feels. We had a ton of stimulus that drove a ton of spending last year, retail sales were up above typical levels, advertising was up, the digital advertising especially was up-- was well above normal levels.

So we had a big year that was kind of pushed and fueled by stimulus. And we're not going to see that play out again this year. That's part of the call on Snap but on the digital advertising market as a whole, we have some real difficult comps as we kind of work our way through the next couple of quarters.

For Snap, and the space also in general, Apple's privacy initiatives have really created a big challenge in the ecosystem. It's really turned it on its head. It's become a lot harder to target consumers-- it's become a lot harder for advertisers to target consumers. It's become harder to measure the effectiveness of that advertising. We saw Snap kind of be surprised by the impact on its platform last quarter, it's been a big impact for Facebook as well. You know, based on our work and our checks, there's still a lot of ground to make up there.

It's a long-term evolution of the ecosystem that's going to take some time to play out and to resolve. That pull back on the IDFA, the identification for advertisers, it really changes how advertisers can work digitally to target consumers. And it's an impact for Snap and we don't see it going away right away. That puts some pressure on Snap.

And then again just to finish up on that, we talked about valuations, Snapchat, still at a premium level. To us, in this kind of market, that means they need to execute to perfection, and there's just a lot of headwinds for them right now. So we're a little cautious on the valuation still here.

JULIE HYMAN: Hey, Ygal, on the IDFA question, whether it's Snap or Meta for that matter, how do they adapt to that change? Are there things they can be doing that they're not doing, or to your point, not doing quickly enough in order to adapt to those changes?

YGAL AROUNIAN: Everyone's trying to figure it out. The whole ecosystem is trying to figure it out, from Facebook to you know, your Shopify advertiser. The pullback of the IDFA, which helped advertisers track users across the web was the most-- by far, the most effective advertising tool I think the advertising industry has ever seen.

Really helped kind of find the right audience, target that audience, re-target that audience, and ultimately get them to make that transaction. There was a lot of visibility from you know, all the way at the top to finding the right person, all the way to the end to the transaction. And now we've lost a lot of that visibility.

So you know, it's about putting in alternative measurement products to be able to track those conversions. So they can tell advertisers, hey, you know, this ad led to this sale, we lost a lot of color there. Those are things that will take time to put back into place.

Even once we do, to get the level of visibility we had before IDFA, you know, pre-IDFA, I think is going to be a challenge. So it just takes some time. And then again on the targeting side, they need to-- everybody needs to put in alternative types of tools that can help target advertisers the way that everyone's used to. It's just really not that easy when IDFA was so powerful and now it's not there.

BRIAN SOZZI: So Ygal, you just downloaded Snap, you have neutral ratings on Meta and Twitter but you do have an outperform on Pinterest. What are they doing right now that you like?

YGAL AROUNIAN: So we remain outperform on Pinterest. You know, I will say it's-- there is one very critical factor for them, the stock hasn't worked and won't work until they can kind of fix this. You know, we think or kind of hope that they have troughed this issue around user growth and engagement. They saw a really nice pickup in users during COVID. They lost all of those users in the US and are now back to-- actually slightly below, in 3Q they were slightly below pre-COVID levels of users in the US. If they're not seeing improvements in engagement, if user growth continues to decline, there's no way that the stock can work, that's really critical.

You know, we think they've troughed on that, could start to see improvements there. If we start to see improvements there you know, this is one we talk about valuation, this is one that's trading at trough multiples. The stock's gotten very cheap and if some of those fundamentals return back to where they were, there's an opportunity to see estimates go up, to see multiples go up there.

They are also a little less exposed on the IDFA front. They're still exposed, everybody is, but they are a little less exposed than Snap and Facebook is. You know, the way people use the platform is different, so they show different kinds of intent. There's a lot of data that can help them kind of offset some of what they're losing on the IDFA side. So those are some of the factors. But again without the user growth story turning to be a positive, it's going to be really hard for that stock to work too.

BRIAN SOZZI: Wedbush Securities tech analyst Ygal Arounian, always appreciate you taking the time for us. We'll check with you soon.