What Happened?
Shares of social network Snapchat (NYSE: SNAP) fell 7.1% in the morning session after the company reported underwhelming fourth-quarter results, with revenue roughly in line with expectations.
On the other hand, earnings and EBITDA exceeded expectations. Daily Active Users (DAUs) increased by 9% year on year to 453 million, reflecting continued engagement growth.
However, it appears markets were not impressed with the performance and likely expected more. Wells Fargo analysts downgraded the stock from Buy to Neutral, following the results, adding "Downgrading to Equal Weight from Over weight as Snap enters reinvestment period. An upside option remains with a potential US TikTok ban, but the app redesign is taking longer and ad revenue growth remains stubbornly below industry levels. Stepping to sidelines." Overall, we consider it a mixed yet challenging quarter.
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What The Market Is Telling Us
Snap’s shares are very volatile and have had 22 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 21 days ago when the stock gained 7.8% as the major indices soared (Nasdaq +1.9%, S&P 500 +1.6%) after the Bureau of Labor Statistics reported that core CPI (Consumer Price Index - a measure of inflation which strips out volatile food and energy prices) for December 2024 came in better than expected, rising 3.2% year over year, compared to the consensus estimate for a 3.3% increase. This means that PPI and CPI both came in slightly below expectations. It is important because the results take additional rate hikes off the table, which some investors and market participants were beginning to whisper about.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
In addition, the earnings season is off to a strong start: Banking giants like JP Morgan and Goldman Sachs posted solid quarterly results, further lifting investor sentiment. The true test will come in the coming month or so as the bulk of large publicly-traded companies report their result.
Separately, social media stocks soared after reports revealed that Chinese officials are considering several options, including selling TikTok's U.S. assets to Elon Musk, the owner of social media platform X (formerly Twitter).
Snap is down 3.9% since the beginning of the year, and at $10.80 per share, it is trading 38.1% below its 52-week high of $17.45 from February 2024. Investors who bought $1,000 worth of Snap’s shares 5 years ago would now be looking at an investment worth $667.08.
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