- Giugno 7, 2022
- Posted by: Oliver
- Categoria: Economics, Finance & accounting
Piper Sandler (PIPR) analyst Thomas Champion recently downgraded Snap (SNAP) stock to a Hold rating after the firm missed its first-quarter earnings target by 3 cents per share. According to Chapman, “Last week’s pre-announcement was indicative of deteriorating conditions.”
Snap isn’t well aligned for short-term success, and I’m bearish on the stock; here’s why.
Earnings Review
As mentioned, Snap recently missed its first-quarter earnings target. During the quarter, the company failed to maintain its five-quarter streak of more than 20% user growth as it settled at 18%.
Snap’s income statement embodies the modern economy. The company’s total revenue drawdown showcases the fact that ad revenue isn’t as easy to ascertain as it used to be. Ad revenue is quite cyclical, and the convergence of a more competitive social media space with declining enterprise spending is there for all to see.
Furthermore, Snap’s cash flows have also waned. The firm’s free cash flows dipped to $106 million from $126 million a year ago during the first quarter. Decreasing free cash flow indicates eroding intrinsic value for shareholders, meaning that the stock’s justified fair market value is also subsiding.
Market Headwinds
Snap is facing significant market-related headwinds. First of all, the firm is faced with a rising yield curve, which implies that interest rates will rise, in turn suppressing the equity markets and growth stocks in particular.
Furthermore, as things stand, market participants have succumbed to risk-aversion. Risk-aversion typically presents itself whenever the economy is heading for a contractionary phase. In turn, investors seek safe-haven assets that provide a lucrative real yield rather than growth stocks.
Hedge Fund Selling
Hedge funds clearly don’t see SNAP as a prospect. During the previous financial quarter, hedge funds sold a net 20.5 million shares of Snapchat, which is understandable considering the stock’s Sharpe ratio of -0.11. A negative Sharpe ratio implies that a stock possesses a poor risk/return trade-off, potentially scaring off many hedge funds due to their active trading mandates.
