Interactive Investor

Can this US tech stock come up smiling?

1st June 2022 06:58

Rodney Hobson from interactive investor

An update from this company has spooked investors. Our overseas investing expert asks whether the social media star needs a more realistic outlook.

We have moved on a long way since the tech stocks boom and bust that marked the millennium but investors have just received a timely warning that what goes up into the stratosphere can plunge back down to earth just as sharply. 

Snap (NYSE:SNAP), parent company of the social media platform Snapchat, has spooked investors in a wide range of IT companies with a profit warning that came out of the blue. The shares promptly slumped a remarkable 43% in one day.

It is a sign of how rapidly events have deteriorated that Snapshot now admits that it will fail to reach even the bottom level of its own quarterly forecasts for revenue and profits made only a month ago.

Revenue had been forecast to grow at 20-25% in the April-June quarter, with adjusted earnings showing at least breakeven and possibly as much as $50 million. Perhaps wisely, management has this time refrained from revealing specific figures but we must assume that a loss will be recorded. Snap is running fast just to stand still.

Another reasonable assumption is that figures have deteriorated considerably during May, a trend that is likely to continue in June, given that issues raised in the latest update have, if anything, become more severe. Analysts have been downgrading their forecasts.

Snapchat enables users to post photographs and videos. It claims 332 million active daily users but even that large number can disappear over time. It is particularly popular among teenagers, the generation that is most computer-savvy and therefore able to switch to other digital platforms at will.

The company blamed a decline in the strength of the wider market, pointing to rising inflation, higher interest rates, supply chain shortages and the war in Ukraine. This is a warning for all investors in tech stocks, although it is worth remembering that managements tend to place the blame elsewhere rather than accept responsibility for their own failings or to concede that their product is inferior to whatever else is on offer.

Source: interactive investor. Past performance is not a guide to future performance.

Management remains convinced that more users can be attracted and that it will earn more per user. The big danger is that this could be wishful thinking and that a more realistic attitude is needed.

Snap makes most of its money from placing advertisements on Snapchat and it has been particularly affected by changes in Apple (NASDAQ:AAPL)’s privacy policy, which have made it more difficult to target adverts and measure their success. Yet targeting those who are most likely to respond is the whole point of digital advertising.

Seen as the present and future of advertising, it looked to be a bottomless pit as paper-based media declined but the greater the riches, the more people pile in.

This is a highly crowded market with so many ways that computer and mobile phone users can communicate with each other in subtly different ways: Zoom (NASDAQ:ZM), Facebook (Meta (NASDAQ:FB), Instagram, Twitter (NYSE:TWTR) and more. Big names of the day can disappear rapidly. Who now uses Skype? Who can still remember Friends Reunited?

Snap shares shot up from $10 in March 2020 to a peak of $83 just 18 months later but a fall back to $15, the level the shares were at five years ago, has been if anything even more precipitous. There is no dividend and the prospect of there ever being one to underpin the share price is as remote as ever.

Hobson’s choice: the risks are just too great, so stay well clear. If you are an unfortunate, long-suffering shareholder who failed to get out while the going was good, it is not too late to bite the bullet and sell. It is hard to see the shares soaring again any time soon.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.