Why Snap Inc Tumbled 16% Last Month
What happened
Shares of Snapchat-owner Snap Inc (NYSE: SNAP) were fading last month as investor sentiment weakened for the high-priced social-media stock as it got hit by price cuts and analyst downgrades at the beginning of the month.
As the chart below shows, much of the stock's slide came in the first week of June. According to data from S&P Global Market Intelligence, the stock fell 16.2%.
So what
Snap stock fell 4.1% on June 5 after JPMorgan Chase lowered its price target from $20 to $18, as analyst Doug Anmuth reduced his sales expectations for the company's Spectacles, and noted slowing ad revenue and daily average user growth.
The following day, Snap announced the acquisition of location-based start-up Placed, which tracks the location of smartphone users, for a reported $200 million. However, the stock's slide resumed later that week.
The stock fell more than 7% over June 8 and June 9 as Nomura analyst Anthony DiClemente issued a bearish note, saying that iOS downloads for Snapchat were falling in the second quarter, while rival Instagram's were growing. The next day, Citigroup followed suit, lowering its rating from buy to neutral, saying that monetization growth may not be as fast as originally modeled.
Now what
Despite the negativity from analysts, Snap has not been standing still. In addition to the Placed acquisition, the Snapchat parent acquired social map app Zenly for $250 million to $350 million, and launched a location-sharing feature called Snap Map that allows users to see where their friends are. It also made a deal with Time Warner Inc (NYSE: TWX): The media giant will spend $100 million on shows and ads over the next two years on the Snapchat platform.
Last month, Instagram Stories passed more than 250 million users, a sign that the Facebook (NASDAQ: FB) property is taking attention away from the disappearing-messaging app. Snap Inc still has plenty of potential, but the downgrades seem correct in light of the stock's blockbuster valuation and slowing growth.
With hundreds of millions of dollars going out the door in acquisitions, an ongoing operating loss, and a $20 billion market cap, the company still has to prove itself in the numbers to justify its current valuation. That means that a continuing retreat in the stock price seems more likely than a recovery, for now.
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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.