Shares of Snap are off just over 20% this morning, a huge cut to the valuation of the social networking company.
In one sense, the post-earnings drop is an indictment of the company’s business. On the other, Snap’s stock has merely retreated to midyear levels and remains far above the historical price range it found itself mired in during its more unprofitable days.
But Snap’s earnings report and its ensuing selloff have not held their impact to just the company’s own value. Other social companies have also taken hits: Facebook shares are off nearly 5% this morning, while Twitter is off around 3%. It’s an arse day for social media companies that are public — and for their private-market brethren, even if we can’t see their prices change as granularly.
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Let’s answer the why before we get into what the situation may mean for social companies more generally. We’ll focus on Facebook at that point, considering its metaverse and impending name change.
Why Snap is down: Supply chains and Apple’s power
Snap posted $1.07 billion in revenue in its most recent quarter, lower than market expectations of $1.10 billion, per CNBC reporting. That revenue result was up 57% year over year, and Snap narrowed its net loss to just under $72 million in the quarter, down from just under $200 million in the year-ago quarter.
Even better, Snap posted massively improved cash flow results in the period when compared to its year-ago results. Growth? Check. Improving profitability? Check. Ability to self-fund? Check. And yet its stock fell sharply. Why? Guidance.
Looking ahead, Snap said that it expects revenues for Q4 2021 “to be between $1.165 million and $1.205 million.” The market, in contrast, expected the company to generate $1.36 billion in the current quarter. The lowest analyst estimate for Q4 2021 Snap revenue that Yahoo Finance has on file was $1.20 billion. The company may miss even that guess.
Companies that are valued more on growth than GAAP profitability tend to swing sharply when growth slows. And Snap is forecasting an almighty revenue growth deceleration. That explains the selloff. But what explains the company’s slowing revenue growth?