Snap (SNAP  ) plummeted 22% following the company's miss on Q3 earnings. This ended a five quarter streak that the company had of topping analysts' expectations. In fact, Snap had been on quite the hot streak as the pandemic led to an acceleration in user growth and time spent on the app which gave the company more opportunities to deliver ads. It also was increasing monetization per user.

However, this momentum is clearly abating, and Apple's (AAPL  ) recent change in how apps can track users is certainly having an impact on all social media companies. These trends are evident in analysts' 2022 full year EPS estimates which climbed from $0.35 to nearly $1 from March 2020 to August 2021 before EPS estimates started moving lower by 20% over the last couple of months.

Inside the Numbers

In Q3, Snap reported earnings per share of $0.17 vs expectations of $0.08. However, the company slightly missed on revenue at $1.07 billion vs expectations of $1.1 billion. Overall, this was a 57% increase in revenue and a 66% jump in earnings.

Daily active users came in slightly above expectations at 306 million vs. 301.8 million. However, average revenue per user missed at $3.49 vs. $3.67. The biggest factor in the miss in revenue and revenue per user is that Apple's privacy changes had a greater than expected impact on advertising. According to CEO Evan Spiegel, "While we anticipated some degree of business disruption, the new Apple-provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS."

The weakness has been widespread across all social media stocks following earnings due to these issues. Many social media stocks have experienced massive gains over the past year due to the pandemic leading to higher ad rates and engagement. Now, they seem to be facing a period of slowing growth, compounded by Apple's changes which are forcing many companies to shift from ads to e-commerce.

Snap's outlook also fell short of expectations as the company projected Q4 revenue between $1.16 billion and $1.20 billion which is short of the $1.36 billion that analysts were looking for. The company expects to reach 316 million users next quarter which was above expectations of 312 million.

Stock Price Outlook

Despite its sharp decline, Snap remains quite expensive with a $120 billion valuation. If an investor is confident in the company's ability to offset losses from the ads business to a more lucrative area like e-commerce, then the stock is a screaming buy. However, there is no certainty that Snap would be able to pull it off given the difficulty and time required.

Therefore, the stock should be avoided for now by most investors. Stocks with big earnings misses and uncertainty tend to put investors in a sell-first, ask questions later type of mood. The high valuation also means that there is no natural floor to support the price.