Stock in Snapchat parent Snap (SNAP) is trading around 30% below yesterday’s close in this morning’s premarket as I write this. That is a massive drop and is usually the kind of thing that would have me looking seriously at buying on the basis that a decline of that size is usually an overreaction. In this case, though, the 30% looks justified and may be just the beginning of a sustained period of weakness for the stock given what we have seen from others this earnings season.
We are now just about a month into calendar Q4 earnings and the reports of around half of S&P 500 companies are in the books. It is therefore a reasonable time to look for themes and for trends. There have been some marked performance differences based on sector, with some, like financials, disappointing while others, most notably tech, have outperformed expectations, but overall earnings growth on a year-to-year basis has bounced around from a small negative number to a small positive with a slightly below average percentage of EPS beats.
Probably the most notable thing about this quarter’s earnings, though, has been that there really is no discernible overarching theme or trend. Rather, it has been a quarter of mixed results all around. As a result, it is easy to draw a stark contrast between the Q4 results of individual companies and assess stocks based on those companies’ strengths and weaknesses. We got another chance to do that after the close yesterday when Snap reported.
Their earnings didn’t look too bad at first glance. They made money for starters, and even beat expectations, with EPS of $0.08 versus a consensus estimate for $0.06. The devil, though, was in the details.
Revenue was a little light because of lower than expected revenue per user, indicating a shortfall in ad revenue. If that were just a sign of overall weakness in digital advertising it might not be too much of a concern, but coming on the back of good reports from other companies in the digital advertising game, it is a worrying shortfall. The big three in that area, Meta (META), Alphabet (GOOG, GOOGL), and Amazon (AMZN) all reported a strong bounce back in digital ad revenue last quarter and sounded optimistic notes about the future.
That optimism made Snap’s caution sound even more concerning than it might have been. Snap is not a victim of a weak market. It is a company that is underperforming in a relatively strong market.
To be fair, they are at least trying to do something about it. Earlier this week they announced that they are cutting about 10% of their workforce. That is bad news if you are one of their employees whose job is being cut, but looks like a necessary move from a company whose employee costs are higher than others in the industry. They also said that they are going to focus on growing user numbers, which seems like a reasonable way of attracting more revenue.
However, that might not be that easy. Snapchat is popular in terms of global active users, but growth has slowed recently, and if you have children of a certain age, you will probably know that Instagram has gained ground in terms of popularity, at least here in the States. Even if Snap does succeed in revamping the platform’s image and increasing popularity, though, the fact that they are falling behind in terms of ad sales even as they are growing means that boosting user growth probably isn’t the answer. Popularity with users is less of an issue than popularity with advertisers, and if they can’t get that right, a 10% cut in employees is just the beginning.
A massively bad reaction to earnings is nothing new for Snap. It has happened before and has proven to be a good opportunity, something I noted back in October of 2022, but a stock can only bounce back so many times after disappointing traders and investors. This time around, given that the problems are company specific, while there may be a short-term retracement of some of the losses over the next few days, the big drop looks justified, and evidence of a turnaround is needed if SNAP is to recover.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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