Stocks to sell

It’s been a tough year for tech stocks. Especially social media stocks. Major names in the space have given a large chunk of their respective pandemic era gains. With Snap (NYSE:SNAP), the pullback has been even more severe. SNAP stock has given back all of its gains and has fallen back to price levels last seen in Spring 2020.

On the surface, it may seem like the market has overreacted. Unfortunately, this is not the case. Investors haven’t been irrational in sending the stock down 78% since January, and nearly 87% over the past two months.

Many factors are working against it at this moment. These factors will likely persist in the quarters ahead. With more disappointment ahead, the situation could get worse before it begins to get better. There’s a good chance shares could tank once again, like they’ve done several times since last October.

How SNAP Stock Fell Into the Market Graveyard

Macro headwinds have by all means played a role in Snap’s severe stock price decline. Rising interest rates, in response to high inflation, have resulted in lower valuation for tech/growth stocks (valued more heavily on future rather than present results).

Rising concern about a recession has also put pressure on tech stocks. In particular, tech stocks with advertising-based revenue models. However, the biggest factor behind the big drop in SNAP stock is the company’s own underwhelming operating performance in recent quarters.

This kicked off well before the stock market downturn began in late 2021. For instance, shares plunged back in October, following underwhelming revenue numbers and weak guidance for the preceding quarter. Tumbling further due to the late 2021/early 2022 selloffs, the stock did at one point appear primed for a rebound.

Beating estimates for the last quarter of 2021, at the time (February) it seemed as if Snap shares were finding a floor. But the selloff resumed by spring, following its Q1 2022 results, which fell short of expectations. This resumed selloff accelerated in May, as management began to prepare the market for its latest earnings release.

Why It Cratered Again Following the Latest Earnings Release

On May 24, following management’s release of a warning about its upcoming Q2 2022 earnings release, SNAP stock fell a staggering 43%. With such a big drop, many may have thought the negative impact of poor results was already priced-in ahead of the actual release of results on July 21.

Of course, this clearly wasn’t the case. Instead, Snap shares took another similarly-high dive, falling 39.1%, and back to pandemic lows, right after results hit the street. As mentioned, this “full trip” back may seem like a case of the market overdoing it a bit. Taking a closer look at the latest numbers, however, this big drop made sense.

While Daily Active User (or DAU) growth held steady on a sequential (quarter-over-quarter) basis, revenue growth fell considerably. In Q1 2022, the company reported a year-over-year (YoY) revenue growth of 38%. This quarter, revenues were up only 18% YoY.

Worse yet, the company chose not to provide Q3 guidance. Instead, CEO Evan Spiegel vaguely outlined plans to get Snap back into high-growth mode. Spiegel and his team may be earnestly trying to get things back on track, but the issues causing its current growth slump will be tough to overcome.

The Takeaway With SNAP Stock

As Morgan Stanley analyst Brian Nowak noted in his post-earnings downgrade of the stock, two issues that played a role in its poor numbers for Q2 will continue to affect it in the quarters ahead.

The first is a weakening economy. Snap may have thought it could reduce the impact of Apple’s (NASDAQ:AAPL) iOS privacy changes with a pivot to branded ads on its platform, yet an economic slowdown could derail this strategy change.

The second, rising competition. Rival platform TikTok could grab an increasingly larger chunk of the ad dollars that would’ve otherwise made their way into Snap’s coffers.

As revenue growth continues to slow, fully moving out of the red remains murky as well. More disappointment, and lower prices for SNAP stock, likely lie ahead. A falling knife with a ways to go before bottoming out, it’s best to avoid.

SNAP stock earns an “F” rating in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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