Stock prices plummet due to unexpected surprises: Investors' patience is "wearing thin"

Snap stock (SNAP) tumbled Wednesday, dropping more than 30% as investors digested another disappointing quarterly earnings report.

Snapchat parent company announces fourth quarter Quarterly sales came in at $1.36 billion, lower than street expectations of $1.38 billion. The company has currently missed revenue estimates in six of its past eight reports. And now the company says it expects to incur higher losses this quarter than Wall Street expected.

The company now expects its adjusted EBITDA loss to be in the range of $55 million to $95 million for the period, wider than the $32.7 million that Wall Street was expecting.

Snap said the loss would be accompanied by higher revenue growth than this quarter as the company continues its “investment plans.”

A key question for investors is whether these plans will help Snap complete its turnaround story. RBC Capital Markets analyst Brad Erickson thinks investors may be tired of waiting.

“Investors' patience with taking on growth-oriented investments appears to continue to wane,” Erickson said in a note to clients.

Investors have boosted the company's stock by more than 60% in the past six months as excitement builds over Snap's turnaround. However, the stock sold off after Tuesday night's report. The stock price has fallen in response to each of the past seven earnings reports as investors try to determine whether a company once priced above $80 can generate a solid growth trajectory again.

MoffettNathanson senior research analyst Michael Nathanson said the market was “again fooling itself that this time would be different” as Snap stock has soared over the past few months. He added that Snap's article often makes investors feel like there are only four quarters left before they see a “quarter-to-quarter” change.

“The truth is, given the increasing competition for AI-enabled product solutions at large, large companies, it is difficult to see how Snap's competitive position and financial position will significantly improve,” Nathanson said in a statement to customers Wednesday. I wrote it in a memo.

Snap has lagged behind the success of other social media companies in monetizing AI engagement and has seen a worse advertising environment than other competitors.

At the company's financial results briefing, Snap CEO Evan Spiegel didn't provide exact numbers to explain how the company's investment in MyAI, its version of an AI chatbot, is paying off.

“Overall, our generative AI efforts are putting more emphasis on image and video models to help people edit and generate Snaps in new and interesting ways. In fact, we’re using it as a gateway to Snapchat Plus.”

Citi analyst Ronald Georgie said in a note to clients that gross margins “will likely remain challenging” as long as investment in AI products increases.

And that can be a drag for investors looking for long-term profitability, which Nathanson points out is difficult. Simply put, Snap's low-single-digit ad revenue last quarter also adds to the puzzle that has investors wondering why Snap can't compete in the social media and advertising market. It's one part.

“The two biggest behemoths in this space, Google and Meta, are projected to grow their ad revenue in the high single-digit to low double-digit range over the same period, while continuing to invest in their businesses. We continue to question whether Snap is truly “capable of carving out a substantially profitable business,'' Nathanson wrote.