Today’s Snap earnings (SNAP) are a textbook example of how irrational, or at least unpredictable, market reactions can be after an earnings announcement. A reasonable assessment of Snap’s third-quarter earnings results would be “good news, bad news.” But evidently, the myopic market decided to focus solely on the bad news this time around.
Trying to place bets on earnings results is a two-fold challenge. First, you have to guess whether it’s going to be a beat or a miss. Second, you’ll need to predict how the investing community is going to construe and react to the released numbers and guidance.
The good news wasn’t good enough for today’s Snap earnings
Outside of the Snap earnings report, there was a positive announcement from the Snapchat company. Reportedly, the U.S. Department of Justice and the Securities and Exchange Commission have called off their investigation. Allegations had suggested that Snap had misled investors during its March 2017 IPO.
The Snap SEC allegation suggested that Snap, at that time, had misled the investing public concerning how much Facebook’s (FB) Instagram had affected the growth of the Snapchat app. A subpoena had even been issued. But now it appears that SNAP stock investors might not need to worry about the SEC investigation. The company, meanwhile, continues to maintain its innocence. Snap says, “We continue to believe the underlying securities class action’s claims are meritless and our IPO disclosures were accurate and complete.”
If it weren’t an earnings day, that piece of good news might have buoyed the SNAP stock price. Indeed, it lifted the share price briefly in the premarket trading hours. However, it wasn’t enough to lift investors’ spirits. SNAP stock closed down nearly 6% today as traders mulled the Snap earnings release.
A snapshot of SNAP stock
As Market Realist’s Sneha Nahata reported, today’s Snap earnings didn’t seem so bad—for the most part. The analyst community predicted a loss of $0.05 per share, but the actual Q3 result was only $0.04 per share. Nothing to write home about, but a “beat” nonetheless. And certainly much better than the loss of $0.12 per share during Q3 of 2018.
Moreover, Snap’s revenues were actually a “beat” at $446 million versus the average analyst estimate of $435.1 million. Again, that’s a solid improvement over the same quarter of last year. Plus, analysts were expecting Snap’s average revenue per user to come in at $2.10. But the released number turned out to be $2.12 per user.
Perhaps most importantly, the number of daily active users proved to be a decisive win for Q3, at 210 million versus the expected 207 million. This metric is extremely significant for Snap. And, in my view, it ought to have been enough—along with all of the other positive surprises—to push up the SNAP stock price.
So, why did SNAP stock snap? I suppose we could say that it’s the company’s own fault. Snap provided fourth-quarter revenue guidance of $540 million–$560 million. The average of those two numbers is $550 million, which is below analysts’ average projection of $555.4 million.
Time to snap out of it?
Yes, you read that correctly: positive surprises for third-quarter EPS, revenues, average revenue per user, and daily active users. Not to mention the government dropping a huge investigation. Yet the market chose to ignore all of that and punish Snap because the company’s Q4 guidance is slightly below the analyst community’s expectations.
I believe it’s reasonable to wager on investors being unreasonable in the short term—until they snap out of it and come to their senses. It really shouldn’t take very long. And when they do, the SNAP stock price should rebound as the market prices in a solid third quarter and rewards Snap for releasing modest and realistic fourth-quarter guidance.
Or the market could continue to beat up on SNAP stock for a while. Who knows, really? As long as the number of daily active users remains strong, I’m looking forward to a solid fourth quarter for Snap. If the government can forgive the company, so should investors.
For more Snapchat news after today’s Snap earnings, check out Congress in Bid to Force Facebook to Help Snapchat.