It’s been more than 20 years since then Federal Reserve Chairman Alan Greenspan cautioned investors about irrational exuberance, but it still seems many investors haven’t taken that warning to heart.
Take the case of Snap. The Snapchat maker’s stock rocketed upward as much as 29% Wednesday after it r eported its holiday results the previous afternoon before closing up 22%.
Seen through a particular filter, the company’s report was undoubtedly one that its long-suffering investors could cheer. Snap’s top and bottom lines both improved significantly in the fourth quarter from the same period in 2017 and beat Wall Street’s expectations. Snap forecast that its bottom line in the first quarter would likely be better than analysts’ had previously predicted. And perhaps most importantly, its number of daily users — a source of growing concern in recent quarters — came in better than expected.
And that’s usually the key concern on Wall Street — expectations. Often the most important factor in whether a stock trades up or down on a day-to-day basis is not how it’s performing relative to its peers or on some universally recognized scale of profit and loss, but how it’s doing relative to expectations.
Snap certainly succeeded on that measure. But was Snap’s good news so much better than expected that the company is really worth 22% more today than it was yesterday?
It depends on who you ask, of course. Many Wall Street analysts on Wednesday, citing the surprising results, upped their price targets on Snap’s stock, many of them by more than 22%. Nomura Instinet’s Mark Kelley, for example, raised his price target from $6 a share to $9, while Mark May at Citi Research boosted his to $9 from $7.
But those target hikes seemed more to be reacting to the jump in Snap’s price in after-hours trading on Tuesday than to be true re-evaluations of the company’s actual business prospects. After the company reported, its stock rose by nearly 18% in the extended session.
Another way to frame the expectations question is whether investors were so irrationally despondent about about Snap before the report that they’d undervalued the company by 18% or so relative to its new price on Wednesday.
There’s some reason to think they had. Through the closing bell Tuesday, Snap’s stock was down 49% over the previous year and 59% since its initial public offering in 2017. So, it’s quite possible that investors had oversold the stock.
But come on. Even if you play the expectations game, what Snap reported wasn’t spectacular. Good, sure. But not exactly stellar.
Its best result comparable to expectations was its bottom line. It lost 14 cents a share, which was five cents a share less, or 26% better, than analysts were forecasting.
That one figure was a great result relative to expectations, no doubt. But companies aren’t supposed to be valued on a single-quarter’s bottom line. Instead, they’re supposed to be evaluated on how they do on an annual basis. And that five-cent quarterly beat in Q4 looks like chump change in the context of the company’s full-year loss of 97 cents a share.
Meanwhile, Snap’s other results and forecasts weren’t as impressive, compared to expectations. Its revenue for the quarter — $389.8 million, was only $12.5 million, or about 3%, higher than what Wall Street was looking for. At the midpoint of its guidance, Snap’s operating income forecast for the first quarter was about 8% higher than analysts’ expectations, and its revenue forecast for the first quarter was actually $2 million below analysts’ prior outlook.
And it daily active user count? It came in at 186 million, which was somewhere around 1 to 3 million — 1% to 2% higher than Wall Street expected.
In other words, even if you compare Snap’s results to expectations, there wasn’t that much there to justify its stock spiking so much on Wednesday.
And if you take a step back from the expectations game, what you’ll see is a quarterly report card that looked pretty lousy.
Snap posted a $192 million loss in the fourth quarter. Sure, that’s down significantly from the losses it was posting a year ago, but it’s still equivalent to nearly half of its revenue.
You can’t dismiss all that red ink as just paper losses, either. The company is still seeing a major outflow of real cash. Its free cash flow — the amount of cash it generates or consumes in operations less the amount it spends on property and equipment — was in the red to the tune of $149 million.
The consolation for many investors when it comes to money-losing tech startups is that they are growing quickly. But the quarter added more doubts to Snap’s ability to make that claim.
Its revenue did increase by 36% in the quarter from the same period a year earlier. But that was the slowest rate of growth it’s posted since it became a public company. Worse, this marked the fourth-straight quarter that its growth rate fell. As recently as the fourth quarter of 2017, Snap’s sales were growing at a 72% annual rate.
And things could get worse if its user base is any indication. Its number of daily active users was down 1 million from the fourth quarter last year. It hasn’t grown its user count since the first quarter of last year. Don’t expect that count to suddenly rebound in the first quarter this year either; the only guidance Snap officials offered on user count was that they “do not foresee a sequential decline” from the fourth quarter, which isn’t exactly a bold prediction of new growth.
That’s problematic because the easiest way for advertising-dependent companies such as Snap to grow their revenue is to own a rapidly expanding audience. Snap has basically stopped doing that.
None of that is to say that Snap’s business won’t eventually turn itself around. But the evidence to justify any such hope was not in the latest report, at least not for anyone looking at things rationally.
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