What happened
Shares of Snap (SNAP -2.72%) saw huge gains this week that seem set to evaporate on Friday. The social media stock rose 20% through Thursday trading, according to data provided by S&P Global Market Intelligence, as the S&P 500 jumped nearly 4%.
That broader market rally played a role in Snap's stock price surge, and so did high expectations around its Thursday evening earnings report. But the stock looks set to reverse those gains on Friday in response to management's updated outlook.
So what
Snap's share price was down nearly 30% in premarket trading as investors digested that earnings update. The company said in a filing with the SEC that revenue growth slowed to just 13%, marking a sharp deceleration compared to the prior quarter's 38% spike. Financial trends were significantly worse, too. Operating cash flow turned negative, net losses expanded, and the company only barely reached adjusted profitability.
Investors had been bracing for weaker results after CEO Evan Spiegel and his team warned about a softening advertising and user engagement environment. Peer Meta Platforms has been suggesting that a major pullback could be on the way in the wider social media world, too. Thursday's report from Snap fits into that negative short-term growth picture.
Now what
Snap is still growing its user base and attracting more engagement across its augmented reality (AR) and chat platforms. However, average revenue per user, a critical growth metric, is falling. Worse yet, management isn't certain about the timing of any rebound. Executives declined to issue an outlook for the current quarter, citing "uncertainties related to the operating environment."
That lack of clarity is the main reason why the stock turned negative following the earnings report. Investors were hoping that Snap would exceed the low expectations that Wall Street had for the business.
Instead, the Thursday evening earnings report raised new questions about Snap's growth strategy. Executives say they are "evolving" that model in hopes of stabilizing the business. The stock might stay under pressure until investors get a clearer view of Snap's new approach.
