There's some hope that a bottom may be in for growth stocks with higher lows in many names, while the market made lower lows. However, these hopes were crushed for social media stocks in Tuesday's session due to a warning from Snap (Nasdaq: SNAP) about a poor quarter and the announcement of a lawsuit from a D.C. District Attorney which personally targets founder and CEO Mark Zuckerberg over his handling of user data.
As a result, Snap shares were down by more than 30%, while Facebook (Nasdaq: FB) was down 7%. There was similar damage in other stocks reliant on advertising like Pinterest (Nasdaq: PINS) and Etsy (Nasdaq: ETSY).
Meanwhile, related exchange-traded funds (ETF) that have large holdings in social media companies like Global X Social Media ETF (NASDAQ: SOCL) declined over 8% lower, while the Communications Services Sector Select SPDR Fund (NYSE: XLC) and the Vanguard Consumer Discretionary (NYSE: VCR) both fell around 3%.
In some ways, this shouldn't have surprised investors as retail and e-commerce reports are making it clear that consumer spending on goods is rapidly slowing. And, many of these retailers are major advertisers, so their pain translates into less demand for ads.
Snap's Warning
While Attorney General Racine's lawsuit against Facebook made some initial waves, most of the losses in these companies' stock prices were due to Snap founder and CEO Evan Spiegel's warning to employees that a slowdown in the global economy was impacting ad sales. He also hinted that the company would be unable to meet its guidance for Q2 given the deterioration in the operating environment.
In total, there was more than $135 billion lost in market cap across the sector following this announcement for ad-supported, tech stocks. It's also interesting and germane to the recession.
Snap is attempting to frame its difficulties as being more about the economy rather than the company. However, this is not consistent with what we are hearing from bank CEOs who report that defaults remain low and that loan demand is quite strong. Most likely, this is about a shift away from the purchase of goods, while services demand increases.
For investors, it's a clear signal that the damage in growth stocks is far from over. The combination of lower rates and rising revenues meant that investors were willing to overlook shortcomings and keep bidding shares higher. Now, we have rising rates and what could be a decline in revenue, while the stocks remain overvalued by traditional measures.