Snap (SNAP) Stock Trades Up, Here Is Why

Jabin Bastian /
2024/03/07 3:30 pm EST

What Happened:

Shares of social network Snapchat (NYSE: SNAP) jumped 7.5% in the afternoon session after stocks rebounded following Fed Chair Jerome Powell's second day of testimony to the Senate Banking Housing and Urban Affairs Committee. The Nasdaq rose more than 1.5%, while the S&P 500 gained 0.89%. Besides this, we have found no other fundamental or rate-related reasons explaining the improved market sentiments. 

The Fed Chair's speech largely reiterated the previous guidance as the FOMC (Federal Open Market Committee) is expected to continue to use data to inform its monetary policy decisions. The Fed Chair added, "In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks...The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." 

The Fed Chair also highlighted the possibility of rate cuts this year, which is in line with market expectations, saying, "We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year." 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

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What is the market telling us:

Snap's shares are quite volatile and over the last year have had 22 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 29 days ago, when the stock dropped 34.5% on the news that the company reported fourth-quarter results with revenue and average revenue per user (ARPU) missing analysts' expectations amid elevated expectations around changes in the direct response business. User growth was steady, with DAU (daily active users) ahead of estimates as net additions in Europe and the Rest of the World more than offset the customer attrition recorded in North America. This North America attrition is sure to ring alarm bells about competition, with Meta recently reporting very encouraging results. While next quarter's revenue guidance was in line, adjusted EBITDA guidance was well below. This shows that Snap's growth is coming at higher costs or less efficiency than expected. Moreover, the ARPU miss and the weakness in North America DAU indicate a challenging road ahead if the company aims to surpass expectations in the upcoming quarter. 

During the earnings call, management hinted at potential growth investments in North America and Europe and expressed optimism about avoiding further declines in North America in Q1. Overall, this was a mediocre quarter for Snap as the market was likely expecting more, considering the strong result reported by Meta earlier in the season.

Snap is down 27.4% since the beginning of the year, and at $11.73 per share it is trading 32.8% 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 $1,236.

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