Snap’s Stock (NASDAQ: SNAP) Drops as Headwinds and Uncertainty See Guidance Absent

Snap's stock (NASDAQ: SNAP) has been on a rollercoaster ride in recent weeks, culminating in a extended hours plunge following its Q1 2025 earnings report. Closing yesterday's regular session at $9.09, the stock has dropped 14.41% after hours, despite an upside revenue beat, with the lack of guidance, and an EPS miss, seen as a drag.

Whilst revenue of $1.36 billion beat the streets expectations of $1.34 billion, EPS came in sharply lower than anticipated. The loss of $0.06 per share came as the street was looking for a positive $0.04 EPS. Daily average users grew 9% YoY to 460million, as advertiser numbers increased 60% over the same period.

The lack of guidance due to macro uncertainty, and comments surrounding headwinds in the present quarter, alongside the EPS miss was enough for the stock price to fall sharply back below $8.

The lead-up to earnings had already been particularly volatile for SNAP holders. After dipping from $9.41 on March 25 to a low of $7.61 on April 21, Snap shares mounted a notable recovery, climbing steadily through the following week. This included a significant 6.14% jump on April 24, eventually reaching $9.09 by the recent close.

While the recent price action suggested optimism into earnings, a closer look at Snap's financial health reveals a more nuanced picture. On the positive side, the company boasts strong short-term liquidity. Data indicates a healthy current ratio of 4 and a quick ratio of 3.8, suggesting Snap has ample liquid assets to cover its immediate liabilities – a crucial buffer in a volatile market.

However, profitability remains a persistent challenge. Snap continues to grapple with a negative pre-tax profit margin, indicating that its core operations are not yet generating profits before accounting for taxes. Furthermore, a relatively high debt-to-equity ratio of 1.73 underscores the financial leverage the company carries, potentially increasing risk for equity holders, particularly if interest rates remain elevated or rise further.

The core tension for Snap lies in balancing user growth with effective monetisation. While the company reported a respectable 9% year-over-year increase in Daily Active Users (DAUs), reaching 453 million in the fourth quarter of 2024, translating this engagement into dollars remains a hurdle. Average Revenue Per User (ARPU) in the key North American market saw only a modest increase to $9.73. This relatively slow ARPU growth, compared to user base expansion, signals ongoing difficulties in maximising revenue from its large and engaged audience, a key metric investors will scrutinize in the upcoming earnings release.

Snap doesn't operate in a vacuum. The digital advertising space is fiercely competitive, dominated by giants like Meta Platforms (formerly Facebook) and Alphabet (Google). Meta's recent announcement of a $1 billion investment in a Wisconsin data center signals its commitment to strengthening its infrastructure, likely intensifying competition for ad dollars and user attention. Furthermore, emerging threats from rivals like ByteDance, reportedly developing AI-powered smart glasses, could directly challenge Snap's strategic focus on augmented reality (AR) hardware and experiences.

Macroeconomic factors add another layer of complexity. Analysts at Oppenheimer have flagged Snap's vulnerability to potential China-related economic risks and its exposure to cuts in discretionary advertising budgets, particularly during periods of economic uncertainty. This led the analysts to express a preference for industry peers like Alphabet and Pinterest, perceiving them as potentially more resilient.

The post market plunge in the stock has seen SNAP return to a $7 handle for the time being, with the 52 week low of $7.08 now standing significantly closer than the high of $17.33. Whether bulls are ready to step back in at support with the current lack of clarity over financials remains to be seen.