It’s not inconceivable that Snap (NYSE: SNAP) shareholders think they are on a rollercoaster. This social network stock has been very volatile in the past year.
Snap stock rose from $10 per share in March 2020 to $83 in September 2021. It's currently trading at $9.88 per share at the time of writing. Snap earnings day was a disappointment in July, and it crashed 39% in a single trading session last month.
That’s been Snap’s story in 2022. The stock has always shown glimpses of potential, which makes it rise, but these glimpses are followed by long periods of disappointment. The stock has fallen almost 79% this year.
Snap missed estimates in Q2
Snap reported its Q2 numbers after market close on Thursday, July 21. Revenue came in at $1.11 billion compared to analyst estimates of $1.14 billion. Revenue was up 13% compared to the corresponding quarter in 2021, but top-line growth is slowing down. For example, sales in Q1 grew 38% year-over-year.
Further, the average revenue per user was down 4.5%. And the most damming factor was the fact that Snap didn’t give Q3 guidance. Instead, CEO Evan Spiegel said, in a release, “While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition.”
One inexplicable announcement was a $500 million stock buyback program. Snap reported an adjusted EPS of -$0.02 in the June quarter as net losses came in at $422 million compared to $152 million in the year-ago period. At a time when growth is slowing down, and the business environment is uncertain, a company would ideally shore up its cash reserves instead of spending it on a stock buyback program. As of June 30, 2022, Snap had $4.9 billion in cash and equivalents.
Is it all bad for Snap stock and investors?
Snap’s number of daily active users came in at 347 million versus an estimated 343.2 million. It also said, “The daily average number of Snapchatters aged 25 and older engaging with shows and publisher content increased by more than 40% year-over-year.” The dark lining here is that the company hasn’t figured out how to monetize them.
The company is betting big on AR (Augmented Reality). It launched Lens Cloud, a collection of backend services that expands AR experiences developers can create. Snap has tied up with brands like Vogue and Tiffany with different offerings.
Earlier in 2022, Snap estimated revenue growth of 18% for Q2. However, the company said it would likely miss its guidance and alluded to a shaky business environment on May 23. It had filed a letter with the SEC that said, “The macroeconomic environment has deteriorated further and faster than anticipated.” The letter said that Apple’s privacy policy changes made it harder to sell targeted advertising, and demand was slowing down.
Snap’s quarterly letter to shareholders said, “We are also seeing increasing competition for advertising dollars that are now growing more slowly.” This is an indication of the pressure TikTok is exerting on its peers.
Snap depends a lot on large brands for its advertising. In an economy still struggling with supply-chain issues, high inflation, rising interest rates, and a potential recession, it is likely that these brands will cut down on their ad budgets leading to more pain for Snap.
The average consensus target for Snap stock is $25.3, a potential upside of over 154%. Snap is a stock with a tremendous payoff, but it also comes with a lot of risks.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
