Shares of Snap (SNAP +0.00%) plunged 30.7% lower in February 2024, according to data from S&P Global Market Intelligence. The sharp move hinged on the Snapchat company's fourth-quarter earnings report, with a single-day price drop of 34.5% the following day. But there's still some mystery to unravel because Snap's results actually exceeded average analysts' expectations. That kind of surprise usually leads to higher stock prices, not lower ones. Snap took the road less traveled.
How did a solid earnings surprise inspire a brutal price cut?
The fourth-quarter report showed revenues rising 5% year over year to $1.36 billion. On the bottom line, earnings fell from $0.14 per share in the year-ago period to $0.08 per share in the latest report. Wall Street's consensus estimates had called for earnings of roughly $0.06 per share on sales near $1.38 billion, so Snap delivered a solid earnings beat with nearly in-line sales.
Not too shabby, right?
Well, it was a far cry from the strong results seen in recent earnings reports. Snap tends to outdo those analyst targets by a much wider margin, along with the occasional double-digit percentage surprise on the top line. This mixed performance wasn't anywhere near Snap's usual standard of excellence.
Moreover, management's first-quarter guidance suggested a robust 13% growth spurt for revenues, but adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will slide back into negative territory.
Snap's turnaround in ad sales is lagging behind management's plans and Wall Street's expectations, and the headwind only grows stronger when you contrast Snap's slow progress against quicker rebounds for rivaling digital advertising platforms.
NYSE: SNAP
Key Data Points
Does Snap have a future in social media?
The digital ad sector is springing back to life after two years of inflation-scented winter. That should be good news for Snap on a fundamental level, but the company competes with a large number of proven winners. Yes, large-scale advertisers are getting richer marketing budgets again, but every dollar will still be invested in the most cost-effective advertising channels. Most of the time, Snap isn't it.
The company is revamping its platform to boost user engagement by monetizing clicks at the end of the advertising funnel. Direct purchases resulting from Snapchat's ad clicks rose by 90% year over year, which could be the start of a lucrative future. But it's also a very small part of Snapchat's overall revenue stream, which mainly relies on brand-boosting messages rather than purchase-oriented ads.
This report knocked the wind out of Snap's sails after a strong third-quarter update and promising signs of a digital ads recovery over the holidays. The company's privacy-focused social media systems aren't striking a chord with advertisers right now despite robust growth in the user base. The stock has now traded almost exactly sideways in 52 weeks, with just a 1% gain, far behind most sector rivals and the stock market as a whole.
Some might call this a buying opportunity, but I'm not so sure. There are too many ways to share quick-hit content across social media services nowadays, and the history-less chat platform never made sense to me in the first place. I don't see a guaranteed long-term winner here, just another former market darling down on its luck -- perhaps for good.
