• Snap announces it will not reach 20% revenue growth goal in Q2.
  • CEO Evan Spiegel says inflation, rising interests are biting into business.
  • SNAP stock now has only covid low as support.

Update: Snap Inc's (SNAP: NYSE) shares lost over 43% over its value in a single day on Tuesday, hitting the lowest since April 2020 at $12.55. The collapse in the shares of the social media company was triggered by a bleak warning on earnings from Snapchat parent. The firm warned of tough times ahead for the once-booming digital ad industry after its earnings disappointed. The company also said that it expected to miss quarterly revenue and profits targets that it set just a month earlier and would have to slow hiring and lower spending. This sparked a wider sell-off, knocking off the major US indices. Nasdaq Composite Index emerged the biggest loser, down 2.35% on the day.

On Monday, night euphoria over Zoom Video Communications (ZM) raising guidance suddenly gave way to gloom from video-sharing platform Snap (SNAP stock) announcing ahead of time that it would not meet earlier guidance for 20-25% revenue growth in the second quarter. Snap stock caved 31% to $15.51 afterhours and is down a similar amount in Tuesday's premarket.

Also read: 5 popular consumer cyclical stocks to sell in May and go away: ATER, BBIG, CPNG, BROS, HYLN

Snap Stock News: A bad macro environment

The view from Snap headquarters in sunny Santa Monica is that the macroeconomy is making firms less excited about ad spending. Snap CEO Evan Spiegel announced the lackluster outlook at JPMorgan's technology conference. He said in response Snap had decided to slow hiring and look for other ways to cut costs. In a note to staff members obtained by Bloomberg, Spiegel wrote:

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.

This moribund outlook immediately caused a broad tech sector sell-off afterhours. Meta Platforms (FB) dropped 7% to $182.60. Twitter (TWTR) dropped another 3.6% to $36.51. A major reason for Snap’s lack of sustained profitability (it has never had a full year in the black despite being publicly traded for five years) is that it spends immensely on R&D. As The Financial Times pointed out, in its most recent quarter, Snap sustained R&D spending that amounted to 43% of its revenue. Facebook, which has been lambasted for spending so wantonly on its metaverse future, spent 28% of revenue on R&D in Q1.

An important caveat to the doom and gloom surrounding Snap’s failure yet again to pivot toward profits is that it has a fortified war chest of around $5 billion. This is made up of about $2.6 billion in marketable securities and $2.4 billion in cash or equivalents. This is all due to its ambitious selling of convertible bonds, which provides it with a long runway to achieve long-term goals that hopefully include profits.

Snap Stock Forecast: Covid nadir looms ahead

Now that SNAP stock has transgressed the long-term support at $20.60, which held from the summer of 2020, little historical support remains other than the covid drop of March 2020. During that period, SNAP stock dropped off a cliff with the rest of the market but found support just above $8. This level all the way up to $10 appeared to act as a base of support during those harrowing days. Once again this demand zone should act as a wall of defense against any further deterioration in share price.

Falling to $10 would require a further 1/3 sell-off, which may seem unlikely. After all, the Relative Strength Index (RSI) is already supplying a reading of 21, meaning extremely oversold. Most prognosticators are calling for the S&P 500 to bottom this summer somewhere between 3,400 and 3,800. In the event any individual session hosts a severe sell-off, $10 may be in reach. SNAP is not neutral until it closes above $22. It is not out of the woods either until it surmounts $24.70, which at current prices in the $15s seems a long way off.

SNAP 4-hour chart

Previous updates

Update: SNAP shed 43.08% on Tuesday, following a 30% decline on Monday, as investors are still digesting the poor earnings result. The share settled at $12.79, not far from its 52-week low of  $12.55. Wall Street spent the day in the red but managed to recover some ground in the last hour of trading. The Dow Jones Industrial Average was able to add 0.15%, but the S&P 500 shed 0.87%, while the Nasdaq Composite lost 270 points. Lingering growth and inflation concerns undermined investors' mood, which once again moved into safer assets. Government bonds were up, with yields falling to fresh weekly lows. Stocks found support in comments from Fed's Raphael Bostic, who said that the central bank may hike a couple of times and then pause in September, to evaluate hikes result on economic progress. 

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