What happened
Shares of Snap (SNAP -2.90%) jumped this week after the Snapchat parent got slammed in its earnings report last Thursday.
The gains seemed to signal that investors thought the stock was oversold after last week's plunge, and part of the rebound came in response to hopes of a "Fed pivot," or that the Federal Reserve would ease back on its interest rate hikes.
Disappointing earnings reports from peers like Alphabet and Meta Platforms also seemed to confirm that Snap's problems were mostly due to the macroeconomic climate rather than an issue with the company.
As of Thursday afternoon, the social media stock was up 23.6%, recouping most of its losses from last week.
So what
Last Friday, Snap stock plunged 28% after the company issued disappointing numbers in its third-quarter earnings report and said things could get worse in the fourth quarter. Revenue rose just 6% to $1.13 billion, and adjusted earnings per share fell by 52% to $0.08. On a generally accepted accounting principles (GAAP) basis, it lost $359.5 million as it continues to spend aggressively on share-based compensation.
However, investors seemed to take another look at the stock this week and found some upside potential. Despite the weak financial results, Snap continues to post strong user growth as daily active users were up 19% to 363 million, or up 4.6% sequentially, showing steady growth. That also indicates that Snap's problems have more to do with macroeconomic conditions than a sudden slowdown in usage.
Investors became more hopeful of an upcoming Fed pivot amid signs that the economy is already starting to buckle higher interest rates. Home-price growth in August, for example, decelerated by the fastest pace in the history of the Case-Shiller index, and the index showed that home prices peaked in June. Elsewhere, the Bank of Canada surprised investors by raising rates by less than expected.
Now what
It's clear that macroeconomic headwinds are dashing ad spend across the digital advertising industry, but Snap still has work to do to build a stronger business. The company is cutting costs, saying it was laying off 20% of its workforce and shuttering non-core products. It also said last week it would close its San Francisco office.
If the company can streamline the business, Snap is a good bet to recover when the economy improves. As long as user growth continues, it's a mistake to count the company out.
