Why Snap shares were bouncing back today

A day after the stock tumbled, investors saw a buying opportunity.

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

What happened

A day after Snap (NYSE: SNAP) plunged 43% on a guidance cut, the social media stock was bouncing back as investors seemed to spy an opportunity in the sell-off. 

As of 12:22 p.m. ET today, the stock was up 9.8%. 

So what

On Monday night, Snap issued a filing saying it now expected second-quarter revenue and EBITDA to come in below the bottom end of its previous guidance due to a deteriorating macroeconomic environment. In other words, the company now expects revenue growth of less than 20% in the second quarter, and to report an EBITDA loss for the quarter. 

That warning was enough to sink the whole tech sector yesterday with a number of digital advertising stocks falling double digits. However, today investors seemed to spy a buying opportunity in Snap stock, and it's easy to see why.

If Snap's argument about macro conditions is correct, then a 43% sell-off in the stock seems excessive. The company isn't losing market share and its long-term growth plans are still intact. However, there are a number of signs that the overall economy is decelerating. The Federal Reserve is aggressively raising interest rates. Inflation is at a 40-year-high, and a number of tech companies have announced layoffs or hiring freezes.

After yesterday's plunge, the stock trades at a price-to-sales ratio of just five, the cheapest it's been since it went public.

Now what

Advertising is cyclical, so it makes sense that companies like Snap would see demand falling in a weakening economy. However, the overall business still looks solid as it continues to grow its user base and remains popular with teens even as TikTok has grown.

While the next few quarters could be tough for Snap, there's a decent chance the stock could be significantly higher in a few years. 

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

Jeremy Bowman has positions in Snap Inc. 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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