The Pandemic 'Bubble' Is Still Losing Air

A 'cheap' stock gets cheaper... Snap just said what everyone is feeling... The pandemic 'bubble' is still losing air... Silicon Valley is on edge... Higher costs and difficult decisions... Last call to prepare for the 'aftershock'...

This is exactly what we meant yesterday...

Social media company Snap (SNAP) filed an important update with the U.S. Securities and Exchange Commission ("SEC") last night. In short, the company warned that it would likely undershoot the second-quarter forward guidance it predicted just one month ago.

It's almost as if company executives read yesterday's Digest – which came out around the same time – and said, "OK, let's just do this now and get it out of the way."

With the help of our colleague and Stansberry NewsWire editor C. Scott Garliss, we noted yesterday that many companies typically don't like to slash their "forward guidance" – or expectations for earnings and growth in the year ahead – until the second quarter.

It's just a part of human nature – and Wall Street.

Scott, who spent 20-plus years trading for institutional firms before coming to Stansberry Research, reiterated today in the NewsWire that companies typically don't cut annual outlooks in the first quarter. That's because, according to Scott...

If things are going badly, there's still a lot of year left to make up for lost ground. And if things are going well, no one wants to jump the gun.

It's not usually until the second quarter of the year that management teams begin to endorse numbers. At that point, they're about six weeks into the third quarter of the year. They've got decent visibility into what the business trends look like.

The point being... a lot of stocks might look "cheap" today – with more palatable price-to-earnings (P/E) ratios, as share prices have fallen but earnings expectations or guidance hasn't yet.

However, these stocks will likely look "expensive" again soon when earnings "catch down" – when more companies do what Snap did last night.

As we said yesterday, this dynamic could lead to more selling of stocks from institutional investors in the next few months as they suddenly see their holdings as overvalued. And it could ramp up significantly when second-quarter earnings season begins in July.

And we just got a head start with Snap's admission...

As the company disclosed in a Form 8-K yesterday with the SEC...

Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range.

Translation... We're not going to hit the numbers we expected less than a month ago.

In turn, Snap's shares plummeted more than 43% today to less than $13 per share. The stock is now down roughly 85% from its previous high in September.

Want to know what a bubble (still) popping looks like? This is it.

First off, to our surprise, we learned today that Snap markets itself as a 'camera company'...

That's a clever way of sprucing up the fact that the company's most popular product, Snapchat, is a social media app that uses Apple's (AAPL) iPhone cameras, in many cases.

That's your first warning sign of a company to avoid owning... It's trying to disguise itself as something that it's not.

I'll bet that if you asked most of Snapchat's roughly 330 million reported users – predominantly millennials and members of Gen Z in the U.S. and India – close to zero would say it's a camera company. (Though, just a few weeks ago, Snap started selling a tiny drone with a camera for $230.)

To our point, the company isn't warning of lower earnings this year because it's not selling enough cameras. It's because in a slower-growth, higher-inflation world, businesses that want to be profitable seek to cut costs. And one of the first things to go is advertising.

That happened during the 2008 financial crisis and the ensuing recession as well... And it proved to be the death knell for many legacy media outlets, like newspapers.

Today, the same themes are impacting new media companies in the social and streaming industries...

Snap's business model relies on one revenue stream – making money from ads that appear in its app. The company doesn't have a paid subscription model. It simply seeks to monetize users by encouraging them to click through to ads that other companies buy.

Evidently, the company has already seen enough of a hit to revenue over the past month that it wanted to let the SEC know things weren't going well. (In our humble opinion, it should stop calling itself a camera company as well.)

The point is, some air still remains in the COVID-19 pandemic 'bubble'...

The bubble might've gotten much smaller in the first five months of this year... But it's not gone yet. We're seeing that play out in the markets in real time right now...

Today, tech companies tied to digital-advertising revenue streams were dragged down with Snap. Pinterest (PINS) plunged nearly 24%... Meta Platforms fell about 8%... and Alphabet and Twitter both closed down roughly 5%.

And the story of Snap could be the proverbial "canary in the coal mine" for more major losses to come. As Scott mentioned yesterday, he wouldn't be surprised if the benchmark S&P 500 Index fell another 15% before it hits "bottom."

On March 2020, at the start of the pandemic and three years after its initial public offering ("IPO"), Snap traded for just $10 per share (down from only $19 per share that January). And it basically showed little promise to becoming a profitable company in the long run.

But when you throw in trillions of dollars of stimulus from the Federal Reserve and Congress, we know what happened next...

People like Dave Portnoy became investing celebrities. GameStop (GME) became a stock that will forever be known for... something.

Along the way, Snap became one of the darling "at home" pandemic stocks.

Businesses spent more money on digital ads. People of all ages spent days inside and often on their phones.

In turn, Snap's revenue grew. And the company became forever connected with other "hot" stocks of the era like Zoom Video Communications (ZM) and Peloton Interactive (PTON).

Then, last October, reality started to hit... The company's third-quarter earnings missed Wall Street analysts' expectations. And Snap blamed it on Apple's new privacy changes impacting its ad business more than anticipated.

But importantly, even back then, Snap CEO Evan Spiegel also warned that global supply-chain interruptions and labor shortages had reduced "the short-term appetite to generate additional customer demand through advertising."

Translation... Companies were spending less money on Snapchat ads.

Six months later, it's the same story. Well, almost... The story now involves the added challenges of the "macroeconomic environment," according to Chief Financial Officer Derek Anderson, who filed Snap's updated guidance yesterday.

We know all about that...

Economic growth – in the U.S. and across the world – is slowing compared to last year. And inflation in the prices of common goods, services, and commodities has rarely ever been higher.

High gas and energy costs are eating away at the margins of small businesses – and giant ones, too, like Target (TGT) and Walmart (WMT). Target CEO Brian Cornell said last week that fuel prices added $1 billion in expenses in the first three months alone.

And gas prices are still rising.

In any case, if you're running a company today, you're likely looking to trim costs wherever you can in order to keep profits high. And if you're a good executive, you're trying to do it without losing current customers.

Advertising is a discretionary item of sorts. Companies can "pull back" on it, especially on an app that you might've just tried for the first time during the pandemic – like Snapchat.

Cutting back on raw materials or employees are more difficult decisions to make.

But those more difficult decisions could be coming, too...

Snap's CEO Spiegel seemed to convey a mixed message in an announcement to employees yesterday. In short, he said that the company will slow the pace of investment and hiring... but it's still looking to bring on 500 new employees by the end of the year.

That might be wishful thinking.

Other Big Tech companies are already hitting the pause button on new hires – and more costs. As the San Francisco Chronicle reported on Sunday...

As murmurs of the second dot-com bubble bursting grow louder, the Bay Area's dominant industry is taking notice – and its most visible players are cutting back. Many of San Francisco's and Silicon Valley's tech companies – ranging from flagship social media brands to nascent startups – are struggling. Brands that had hiring booms in the past two years now face mass layoffs, while even industry titans are grappling with stagnated growth and stalled hiring.

Meta Platforms (FB) has halted hiring new positions in "almost every team" for the rest of 2022. Cryptocurrency exchange Coinbase (COIN) has new plans to "slow hiring and reassess our headcount needs." And ride-sharing giant Uber (UBER) is cutting back as well.

As the San Francisco Chronicle reported, even the most bullish startup investors – namely, Japanese firm SoftBank – recently announced plans to cut back on their investments.

In short, a lot of the "job openings" in the economy right now are disappearing.

This is the next critical story to watch...

By now, everyone knows inflation is high and growth is slowing. But we don't know what comes next...

We lay a lot of the uncertainty at the feet of the Fed... the nature of the pandemic and ensuing government responses... and then, the war in Eastern Europe. The war between Russia and Ukraine made things worse, but we were headed to this point anyway.

Specifically, will the Fed's efforts to lower inflation – by raising borrowing costs in the economy and dampening demand – push the economy into a recession? One could argue, of course, it won't take much... U.S. gross domestic product ("GDP") already contracted by 1.4% in the first quarter.

The Atlanta Fed's GDPNow forecast – which importantly, overshot for the first quarter – is modeling a 2.4% annualized growth for the second quarter. But that could go lower, of course. Just last week, the model lowered a key real estate indicator – "real residential investment growth" – from a projected 1.1% increase to a 0.6% drop.

As I wrote in the May 5 Digest, the Fed's public hope, at least, is for a "soft-ish landing." And the central bank – which we hate writing about so much, even though we know it's needed due to its heavy influence on the markets – has two Congressional mandates... It's mandated to ensure stable prices and maximum employment.

After being slow to act against inflation, Fed Chair Jerome Powell is now banking that a record number of job openings (roughly 5 million) might give the economy enough cushion to absorb the costs of higher interest rates (to help lower inflation) without doing too much damage to the economy in general.

On May 5, I noted that whether that happens is an open question...

Because as you can see, a sharp rise in the unemployment rate is part and parcel of a recession, as shown by the gray shaded areas here... A recession always followed a bottom in unemployment, because historically that's when the Fed starts raising interest rates...

It was the same story even the last time inflation was this high in the 1970s. Are we to believe this time is different?

Sure, it might be different... But we're not willing to bet on it.

An evaporation of the millions of potential jobs in the economy implies at least some amount of contraction – or unrealized potential growth, at the very least. And that's what the stock market is about in many ways.

In any case, costs are definitely higher than they've been in decades. That's a recipe for a stinky meal called "stagflation."

No wonder companies are warning of more trouble ahead. And no wonder stock prices continue to fall.

Speaking of that, it's time for our 'last call'...

As we've written several times over the past week, our colleague Greg Diamond correctly called the "top" of the markets in January. And importantly, he's now expecting another big turning point as soon as tomorrow...

Greg is calling it an "aftershock" to the market sell-off that started the year. His point is that we're in a market downtrend based on the price action.

But importantly, there are ways you can still make money – if you know what to do...

This window of opportunity is closing fast, however. In fact, we're taking Greg's latest presentation and market warning offline at midnight tonight. So if you haven't watched or listened to Greg's message yet, be sure to click here right now to get all the details.

Riding Out the Bear

In this week's Stansberry Investor Hour podcast, Dan Ferris shared his keen observations on the developing bear market. He detailed the steps you can take to protect your portfolio. And finally, he brought on cryptocurrency expert Eric Wade for a special commentary...

Click here to listen to this episode right now. And to catch all of our shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 5/23/22): ProShares Ultra Oil & Gas Fund (DIG), Shell (SHEL), Suncor Energy (SU), and Energy Select Sector SPDR Fund (XLE).

In today's mailbag, feedback for True Wealth editor Dr. Steve Sjuggerud (and a lesson for everyone during these volatile times). Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Steve, my subscription was obviously worth it when I followed your advice and put trailing stops under all my large positions. I stopped out of most everything in December and January and was worried that maybe I missed some upside. Turns out, that really was the top of the market. (I sold NVDA at $273 in January.) I am now in mostly cash and real estate and will wait out the head fakes until things turn around. Thanks." – Paid-up subscriber David W.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 24, 2022