Markets go SNAP

Friday, Feb 4th 2022


The below content and projections are the opinion of the authors. Any conclusions or takeaways are their own. This should not be considered as investment advice. Investing involves the risk of loss and returns are not guaranteed.

Three things this week —

1) COVID’s still coughing on the economy. For nearly two years now, Federal Reserve chair Jerome Powell has been saying some version of the statement that the Covid-19 virus will determine the strength of the economic recovery. And while this statement has seemed more potent at some moments than others, data this week shows the virus is not done with us, or the economy. In January, private payrolls dropped by the most since April 2020, according to ADP. This report showed leisure & hospitality employment was particularly hard hit, accounting for more than half of overall job losses last month, with the spread of the Omicron variant cited as a drag on the overall labor market. With Covid-related work absences impacting supply chains and delivery networks while the virus’ spread hampers growth of some in-person activities, the virus will continue to shape our economic reality, even as we near the two-year mark of the pandemic’s onset.

2) The games don’t stop. GameStop may have been the biggest “meme stock” story of 2021, but the biggest buyers of video games in 2022 are mega corporations. Microsoft announced a deal to acquire Activision Blizzard last month for $69 billion, and this week Sony announced a smaller, but still sizable, $3.6 billion deal for game studio Bungie. There are multiple threads to pull on when it comes to the strategic rationale for console makers owning game studios. But we’re certainly reminded of efforts in the cable industry to control distribution and also own content, a strategy that through time has found only varying levels of success.

3) YouTube beats Netflix, ads be damned. In Alphabet’s quarterly report published Tuesday, we learned YouTube’s revenue in the fourth quarter eclipsed that of Netflix. Of course, different businesses, different models. YouTube is also tucked into Alphabet, which boasts a ~$2 trillion market cap while Netflix is worth ~$200 billion. In a way, it’s a trite comparison. But the success of YouTube and the growth in its ad-related business do reveal that consumers will deal with ads if they like the content. Something to keep in mind as the media world iterates on an idea that ad-free, subscription-based content is an inevitable future.

Two earnings moves to remember —

This past week saw some of the wildest post-earnings swings in stock prices that we can remember. But there was one stock that had two earnings reactions we don’t think investors will be forgetting anytime soon — SNAP.

On Wednesday, February 2, after the market close, shares of Snap fell some 25%. Notably: this move came after a report from a different company.

Fourth quarter results from Meta Platforms pushed Snap shares around, in particular Meta’s comments on how Apple’s iOS privacy changes were impacting ad targeting. On Meta’s conference call, CFO Dave Wehner said these changes would result in $10 billion in lost ad revenue for Meta in 2022. Snap, which flagged iOS challenges in its third quarter earnings report back in November 2021, was presumed by investors to be facing similar challenges.

After the market close on Thursday, February 3, however, shares of Snap rose as much as 60%. This move more than erased all of the decline registered the prior day and came after Snap reported its first quarterly net profit. Snap also reported revenue and user growth that beat analyst expectations, and the company said it was recovering from iOS-related challenges “quicker than…anticipated.”

Single-day stock moves of this magnitude are open to several levels of interpretation. Although Snap may not be a trillion dollar behemoth, at a ~$70 billion market cap the company is no slouch, either. And that shares in a company this size can get pushed around like this says quite a bit about the nervous condition of the market right now.

One thought for the weekend —

A former editor of ours was fond of saying, “It’s all one post.”

In markets, finance, the economy, and the broad sector we call “business,” everything is connected and no one-off event truly happens in a vacuum. This week, some of the world’s biggest tech companies reminded us of this reality once again.

Commentary from executives at PayPal and Meta Platforms explicitly referenced macroeconomic conditions impacting their business. PayPal said “the single biggest contributor to our performance this year is going to be what's happening in the e-commerce market overall,” while the team at Meta noted, “macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets.”

One the one hand, this might seem obvious. Of course companies operating at the global scale of PayPal and Meta would cite macroeconomic conditions and broader industry trends. On the other hand, companies investors think are positioned as leaders in growing markets — PayPal in payments, Meta in social networks — are often believed to be resistant to these outside forces.

If you hear investors talk about “secular” companies, they generally mean businesses expected to steadily grow regardless of the broader environment. These businesses are often contrasted with “cyclical” growers more at the whims of the economy’s ups and downs.

This past week, shares of both PayPal and Meta Platforms fell more than 20% following their comments on the broader environment challenging their businesses. There are, no doubt, specific issues facing both companies. How they work through these periods will define their success for years to come.

But both companies suggested, in their own way, that their durable, secular success has become more vulnerable to unpredictable, cyclical forces. A big change for investors that resulted in a big change in their stock prices.

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