Please ensure Javascript is enabled for purposes of website accessibility

Why Snap Stock Tanked 12% This Week

By Brett Schafer – Dec 17, 2021 at 3:22AM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Unprofitable stocks continued to take a beating this week.

What happened

Shares of Snap (SNAP 1.49%) slumped 12% this week, according to data from S&P Global Market Intelligence. The social media stock, which was one of the huge winners coming out of the pandemic crash, has come back to earth along with a lot of other high-growth stocks in recent months.

So what

Down 12% this week, Snap stock is now down almost 40% in the last three months. This is after shares had surged over 1,000% at some points in the last three years. Many stocks like Snap, with fast-growing revenue but no underlying profits, have hit the brakes the last few weeks. This has been due to some disappointing earnings reports and/or a broad market rotation out of these securities.

Two people looking at their phones on a bed.

Image source: Getty Images.

Snap released its third-quarter earnings results back on Oct. 21. Revenue grew 57% in the period to over $1 billion, with a net loss of $72 million that improved 64% year over year. This was not up to the market's expectations for the quarter, and investors sent the stock down over 20% in the days following the report. Since then, it has been a slow trickle downward for Snap shares, reaching a year-to-date low of $44.70 a share at the close on Thursday. 

The recent sell-off is likely correlated to the broad reversal in high-growth stocks this month, especially those in ARK Invest's exchange traded funds (ETFs). Snap is in two of ARK's funds, the ARK Fintech Innovation ETF and ARK Next Generation Internet ETF. Both ETFs are down over 20% in the last month.

Now what

Even after this big drop, Snap stock still trades at a price-to-sales ratio (P/S) of 19.2, which is more expensive than almost every stock on the market. If it keeps up this level of revenue growth, that multiple will come down rather quickly, and hopefully, investors will get some strong profit margin expansion as well. But it doesn't make the stock a screaming buy, even if it is down 40% off its highs. 

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.