If Tuesday, May 24, 2022, is remembered at all on Wall Street, it may be known as the day when Snap (SNAP -4.06%) stock tanked so hard that it seemingly took down the entire tech sector. As Snap stock took a 43% haircut -- its biggest single-day decline -- traders old enough to recall the bursting of the dot-com bubble may have experienced an unsettling sense of deja vu.
The catalyst wasn't a quarterly report, but a revision of the guidance given in the most recent one. It was an unwelcome surprise to the investing community, but the wholesale share dump offers a second chance to buy the social media giant stock at pre-COVID-19 prices. Is it a buy?
Before the fall
Just a month ago, Snap released first-quarter 2022 results that weren't ideal, but at least seemed par for the course during a time when investors had generally turned sour on the tech sector. Snap grew its daily active users 18% year over year to 332 million in the quarter, and increased its revenue 38% to $1.06 billion. Furthermore, the company swung from adjusted EBIDTA of negative $2 million in the prior-year quarter to $64 million in Q1 2022.
It wasn't all good news, though, as Snap revealed a net loss that deepened to $360 million from the year-ago quarter's $287 million. Investors probably weren't too pleased with the $20 million year-over-year decline in free cash flow, either.
Still, Snap stock didn't plunge in the wake of that report. Throughout April, there was scarcely any reason to worry about the share price falling into the low teens. After all, Snap had guided for second-quarter year-over-year revenue growth between 20% and 25%, as well as adjusted EBITDA between breakeven and $50 million. Sounds reasonable enough, right?
Image source: Getty Images.
A lot to deal with
Unfortunately for shareholders, that April report wasn't the final word on the company's near-term outlook. In a move that apparently took everyone by surprise, Snap made a couple of unpleasant adjustments to its second-quarter guidance.
In a May 23 filing with the SEC, the company stated: "Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range."
The Wall Street Journal reported that Snap CEO Evan Spiegel said in a memo to employees that "while our revenue continues to grow year-over-year, it is growing more slowly than we expected at this time." Reuters reported that Spiegel wrote in a memo: "Like many companies, we continue to face rising inflation and interest rates, supply chain shortages and labor disruptions, platform policy changes, the impact of the war in Ukraine, and more."
These are all known headwinds, of course, and it's not unreasonable for Snap's CEO to prepare employees and investors for a tougher Q2 than anyone could have anticipated a month ago. The quick, drastic drop in Snap's stock price indicates investors immediately priced in the bad news that forecasts negative adjusted EBITDA and sub-20% revenue growth.
There's no reason to suspect that Snap was being disingenuous in April. Rather, the company chose to front-run a potentially disappointing Q2 with the cold, hard truth -- and Wall Street was not pleased.
A snapshot of sentiment
Despite the possibility of the company's EBITDA going negative in the current quarter, Snap could still be considered a thriving business. After all, sub-20% revenue growth would still be growth. Furthermore, Spiegel reportedly said Snap is expected to increase its employee head count by around 500 this year.
Granted, an increasing headcount would drive up expenses, but businesses don't typically plan to hire more workers unless management is optimistic. Speaking of which, the company reportedly also assured that 2022 remains "a significant investment year," so evidently Snap's executives aren't entirely deterred by Q2's anticipated headwinds.
Spiegel has made it crystal-clear that Snap is expanding in more ways than one. In the quarterly conference call, the CEO said the company was "pleased to see elevated growth rates in the rest of world
region," i.e., everywhere besides North America and Europe, where Snap added 10 million daily active users in Q1.
Spiegel added that Snap's growth in these regions "follows our investments in building out the team." Investors can also appreciate Snap's relentless drive to invest in products that expand the company's scope. For example, Snap is cultivating still-evolving features like Spotlight, which focuses on what the company calls "opportunities for creators to improve discoverability;" developing "immersive and interactive experiences" through Snap's Spectacles augmented-reality glasses; and launching the ASL Alphabet Lens, an augmented-reality experience that the company says "inspires Snapchatters to learn American Sign Language through the Snapchat camera." Clearly, Snap has a lot on its plate, but it's all suggestive of management's willingness to push forward and innovate regardless of acknowledged headwinds.
In the short term, however, the stock market is a voting machine and not a weighing machine. Sour sentiment could persist for a while, but long-term investors can still get in at a lower price as long as the initial guidance-revision shock lingers. Indeed, Snap stock looks ripe for the picking as current and upcoming quarters will offer Snap a chance to demonstrate its resilience, growth potential, and innovative drive -- and to show that honesty was the best policy.
