Is Snap stock a buy after its spectacular fall from grace?

A dire warning about the state of the economy sent the social media company plummeting.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

Snap (NYSE: SNAP) stock plunged in dramatic fashion on Tuesday, losing more than 43% of its value overnight. The catalyst that caused shares to crumble was a warning that the company's second-quarter results would come in below its previously issued guidance, released just a month ago.

Factoring in today's decline, Snap -- the parent of social media site Snapchat -- has now lost a stunning 84% from highs reached just last fall. Given its remarkable fall from grace, is Snap stock a buy?

Context matters

As with so many things, the answer won't be the same for every investor but, in a case like this, context is important.

In a regulatory filing late Monday, Snap revealed that prevailing economic forces had turned south and the company was unlikely to live up to its previously released forecast.

"Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated," the company said in a statement. 

A look at Snap's recent results suggests that the company was facing tough comps related to its pandemic-fueled growth last year. For the first quarter (ended March 31), Snap generated revenue of $1.06 billion, up 38% year over year (on top of 66% growth last year). At the same time, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) swung to a positive, while its operating and free cash flow came in at $127 million and $106 million, respectively. 

Snap was guiding for year-over-year revenue growth in a range of 20% to 25% and adjusted EBITDA of between breakeven and $50 million. Now, however, the company is suggesting it won't be able to deliver on those more modest returns.

Other metrics, however, suggest that its growth will continue, albeit at a slower pace. Daily active users of 332 million grew 18% year over year, while users engaged with Snaps Places and Snap Map offerings at twice the rate of the prior-year quarter.

History suggests that advertising is among the first things to go when companies rein in spending and the current downturn will likely be no different. Given Snap's growing user base and increasing engagement, however, the stock looks like a steal at current levels even if it takes some time for the market to recover.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Danny Vena has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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