Why Snap Stock Is Plummeting Today

Key Points

• Snap's Q2 sales met Wall Street's expectations, but earnings missed the target.

• Continued declines for North American user engagement meant that average revenue per user came in weaker than expected.

• Snap's user engagement trends could make it hard for the company to increase profitability.

• 10 stocks we like better than Snap ›

Snap (NYSE: SNAP) stock is suffering big sell-offs on the heels of the company's latest earnings report. The social media specialist's share price was down 18.4% as of 11:45 a.m. ET amid the backdrop of a 0.6% gain for the S&P 500 (SNPINDEX: ^GSPC) and a 0.7% gain for the Nasdaq Composite (NASDAQINDEX: ^IXIC).

Snap released its second-quarter report after the market closed yesterday, and investors are selling the stock in response to details contained in the business update. While revenue for the period met Wall Street's forecast, earnings were below expectations -- and there are indications that the business is now facing a weaker-than-expected outlook.

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Snap stock sinks in concerning engagement trends

Snap recorded a loss of $0.16 per share on sales of $1.35 billion in the second quarter. Sales for the period matched the average analyst estimate, but earnings per share came in $0.01 lower than Wall Street's target. While sales were up 8.9% year over year, user engagement and revenue composition trends point to problems for the business.

Snap's total daily active users (DAUs) rose 8.6% year over year to reach 469 million, but average revenue per user came in at $2.87 and missed Wall Street's target for revenue per user of $2.89. While overall DAUs were up significantly in the quarter, the business saw another dropoff in the crucial North American market. North American DAUs came in at 98 million in Q2, down from 99 million in this year's first quarter and 100 million in last year's second quarter.

What's next for Snap?

Snap is targeting revenue between $1.475 billion and $1.505 billion for the current quarter. Meanwhile, management anticipates ending the period with approximately 476 million DAUs. Even though the company's overall DAU count looks poised to continue rising in the near term, it's seeing engagement declines in the North American market that monetizes at much higher levels compared to other territories -- and its position in artificial intelligence (AI) isn't as strong as other leading social media players.

While the company's augmented reality glasses could prove to be a meaningful catalyst, the core growth engine is facing some challenges right now.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.