Last Friday was pretty dire for the Snap (NYSE:SNAP) share price. The social media company recently released its third-quarter earnings report. And I think it’s fair to say that investors weren’t particularly impressed as the stock collapsed by over 25% in a single day! As drastic as this fall was, I think it’s worth noting that the 12-month performance is still firmly in positive territory above 40%. But even so, what was in the report that made investors unhappy? And is this a buying opportunity for my portfolio?
Diving into the numbers
Despite what the Snap share price would suggest, I think the latest results were reasonably promising. Over the last three months, revenue increased by 57% compared to a year ago, reaching as high as just over $1.07bn. Meanwhile, the firm’s net loss fell by 64%. And free cash flow ventured into the black at $51.7m versus -$69.5m in 2020.
Most of this growth appears to stem from a significantly more engaged community. Daily active users during this quarter reached 306 million. By comparison, this figure was closer to 249 million a year ago, marking the fourth consecutive quarter during which Snap has achieved 20%+ growth in its active user base.
Needless to say, this all sounds quite encouraging. So why did the stock lose nearly a quarter of its value?
The fall of the Snap share price
As promising as this growth appears to be, it seems investors were simply expecting more. While earnings per share beat expectations, revenue growth came up short. Analyst forecasts had placed third-quarter revenue at $1.1bn. Meaning that Snap missed the mark by a relatively small amount.
Seeing such high volatility with a technology stock isn’t exactly surprising. After all, these shares typically trade at a high premium. So, any slowdown in growth can quickly spook the market. But have investors overreacted? That depends on what caused the slowdown.
Earlier this year, Apple announced new changes to its privacy policy. Evan Spiegel, the CEO of Snap, stated at the time that the changes would likely have an impact on performance. It seems the adverse effects were more substantial than initially anticipated, leading to the missed revenue target. But this affects all advertisement-driven businesses, so I’m not surprised to see shares of Facebook, Twitter, and The Trade Desk suffer on this earnings release as well.
An opportunity to buy?
A 25% plummet in Snap’s share price certainly looks to me like an overreaction to what was a seemingly satisfactory report. However, the catalyst behind it is ultimately out of management’s control. And I doubt Apple is going to reverse its privacy decision. The recent slowdown may be here to stay. And it seems management agrees as guidance for the fourth quarter was also lower than analyst expectations.
I’m going to keep Snap on my watchlist to see whether the company can recover its lost growth through other means.