Why Snap Inc.’s Crash Reverberated Across Markets

A massive plunge in shares of Snap Inc., parent company of the social media app Snapchat, reverberated throughout financial markets on Tuesday, as the stock dropped 40% on the heels of a memo sent to employees Monday afternoon. 

In the memo, Snap CEO Evan Spiegel said the “macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.” 

Spiegel pointed to “rising inflation and interest rates, supply chain shortages and labor disruptions, platform policy changes, the impact of the war in Ukraine, and more” as contributing to the macroeconomic deterioration. 

Spiegel claimed that the macro environment had soured so quickly that it would no longer be able to meet the revenue and profit guidance that his company released just a month ago. 

“While our revenue continues to grow year-over-year, it is growing more slowly than we expected at this time. We believe it is now likely that we will report revenue and adjusted EBITDA below the low end of the guidance range we provided for this quarter,” he said. 

That’s a significant statement considering the company issued its last guidance just weeks ago, on April 21. At the time, the company guided to revenue growth of 20-25% for the second quarter. That letter says growth will come in lower than the bottom of that range. 

Read Snap Inc. Dials Back Targets, Falls 40%

In addition to macro issues, Snap has had to deal with privacy changes to the Apple iPhone, which make it harder for apps like Snapchat to target advertisements and measure their effectiveness.  

At the current price of around $13.50 per share, Snap is down 84% from its highs of last year.  

Reverberations  

It’s been a tough market for any growth stock, but especially for those with worsening business outlooks like Snap. The stock’s 40% drop isn’t surprising in the current market environment, which has not shown mercy in recent months.  

What is surprising, though, is the broader market’s reaction to a hiccup in what is a relatively small company. Snap did have a sizable $100 billion market cap at its peak, but today it is valued at only $20 billion.  

Snap’s annual sales of $5 billion are small compared to digital advertising giants Meta Platforms Inc. and Alphabet Inc., which have revenues of $125 billion and $250 billion, respectively.  

Perhaps the market sees Snap as a canary in the coal mine, and if the company sees advertisers cutting back so swiftly, that could be an indication of a deteriorating economy—or at the very least, a deteriorating market for digital ads. 

In sympathy with Snap, Alphabet and Meta tumbled 6% and 8%, respectively, midday on Tuesday. Together, they together make up more than 5% of the S&P 500. 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.) 

The SPDR S&P 500 ETF Trust (SPY) fell as much as 2.5% on the session and continues to flirt with bear market territory, though it hasn’t yet decisively closed below the 20% threshold that separates a bull market from a bear market. 

Follow Sumit on Twitter @sumitroy2