Insights

Why Snap Stock Lost 25% in July

What happened

Shares of Snapchat parent Snap (NYSE: SNAP) crashed last month after the social media maven delivered a disappointing second-quarter earnings report, reporting weak top-line growth and a loss on the bottom line. Additionally, it declined to give guidance for the third quarter, an indicator that the company is seriously struggling in the current macroeconomic environment.

According to data from S&P Global Market Intelligence, the stock finished the month down 25%. As you can see from the chart below, the stock lost even more than that on July 22 after the earnings report came out.

SNAP data by YCharts.

So what

Snap had already slashed its second-quarter guidance back in May, calling for revenue growth of less than 20% and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss, so investors were already expecting a weak quarter. The company’s results were only slightly worse than the analyst consensus, but the update was enough to drive the stock down 39%.

Revenue increased 13% to $1.11 billion, just shy of estimates at $1.13 billion, while its adjusted loss of $0.02 per share missed estimates by a penny. Daily active users increased by 18% to 347 million, showing that the platform continues to attract users, but advertiser demand clearly faded. Competition from TikTok appeared to be among the factors causing revenue growth to slow.

The numbers above don’t fully explain why the social media stock crashed. Adjusted EBITDA plunged 94% from $117.4 million to $7.2 million, erasing hopes that the company had become reliably profitable. Its free cash flow loss widened to $147.5 million, and it reported a generally accepted accounting principles (GAAP) net loss of $422.1 million as the company continued to spend heavily on share-based compensation. That cash burn fed concerns that the company’s spending is out of control and that it won’t turn a GAAP profit for at least several years. 

CEO Evan Spiegel acknowledged that the results “don’t reflect our ambition.”

Several analysts downgraded the stock on the news of a wide range of concerns.

Now what

Management declined to offer guidance for the third quarter but did say on the call that quarter-to-date revenue was flat. It also forecasted 360 million daily active users in Q3, representing 4% sequential growth.

That user growth should offer some encouragement to investors as it shows that most of the slowdown in revenue seems to be from weak advertiser demand. Indeed, the social media sector broadly experienced weak revenue growth in Q2, showing that the macro environment was a significant factor.

However, Snap, at the moment, is a no-growth company generating large losses, and that’s a formula for market pain. That should change eventually, but things could get worse before they get better.

Jeremy Bowman has positions in Snap Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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