Snap's Horrible Guidance Isn't Its Worst Problem

Bad guidance is one thing. But social media company Snap (SNAP) has a bigger problem... Let's deal with the guidance problem first... [Chaikin PowerFeed]( Snap's Horrible Guidance Isn't Its Worst Problem By Marc Gerstein, director of research, Chaikin Analytics Bad guidance is one thing. But social media company Snap (SNAP) has a bigger problem... Let's deal with the guidance problem first... The company expects to miss the lower end of its previous guidance. But that shouldn't shock anyone. After all, [as I said on July 13]( advertising – even the digital kind – is cyclical. And yet, market commentators still tripped over themselves to see who could spin the most negative adjectives after Snap's recent earnings report. And the stock fell 39% on July 22. That's rough, of course. However, it's even worse for Snap... The entire business isn't economically viable. Let me show you what I mean... Recommended Links: [Until MIDNIGHT: Claim 1 Free Year of Prosperity Investor]( Until midnight tonight, you can claim a FREE year to what may be the absolute perfect investment guide for today's market... designed to harness low-risk, recession-resistant gains in must-see "Forever Stocks" (including one company that pays a near 9% dividend!)... along with a handful of breakthrough opportunities with 1,000%-plus potential. [Claim this $5,000 value before this offer expires at midnight tonight](. [Will This Be the Worst U.S. Crisis Ever?]( Wealthy 73-year-old U.S. entrepreneur retreats to one of his three European properties to issue serious warning (and four recommendations) for Americans. "It falls on someone like me to warn you clearly. I'm too rich to care about money—and too old to care what anyone thinks." [Click here for details](. In short, we need to talk about "stock compensation expense" ("SCE"). This a non-cash expense for companies. It's the economic value of stock given by them to employees. Importantly, we aren't talking about gifts. It's compensation for services rendered. Startups can persuade employees to accept lower cash salaries in return for a chance to participate in the company's growth. If all goes well, the company will grow. And in turn, the value of the employees' stock will grow, too. But as always, great tools can be destructive if they're misused... That's the basic reality of SCE. The more stock (often options on day one) that a company issues this way, the higher its shares outstanding can climb. That's because the company simply creates new shares to fulfill its obligations. And it's a vicious cycle... The more shares outstanding in the future, the more dilution. As you might know, dilution happens when more and more shares grab a piece of the available capital. That dilution cuts everyone's per-share values. And of course, this process hurts employees who gave up chances to work for more cash elsewhere. The value of their SCE will be less than they expected – sometimes by a lot. It hurts investors, too. Their stakes also get diluted. But employees at least know up front they're getting less cash in exchange for stock. If they don't like what they see, they can quit and find another job. However, SCE isn't at the top of investors' minds... It's not usually listed in a company's "Income Statement" (which is the first place astute investors usually check). Instead, it typically appears on the "Statement of Cash Flows." Many companies – especially emerging firms that are a long way from sniffing profitability – prefer to strategically rearrange their financials. Businesses like Snap offer management-created "Non-GAAP" items in their investor presentations. (GAAP means "Generally Accepted Accounting Principles." Auditors must approve those items.) On slide 48 (out of 49) of its most recent investor presentation, Snap buried a darn important footnote... First, on that slide, you'll find the company's "Adjusted EBITDA" (which is like what I call "operating profit"). And it looks good... This metric shows that the company lost $720 million in 2017, but it earned nearly $617 million in 2021. However, the second footnote accompanying the adjusted EBITDA line is a killer. It's hiding in light-gray, nano-sized font. Here's the relevant text... We define Adjusted EBITDA as net income (loss), excluding... stock-based compensation expense and other payroll related tax expense... Snap isn't doing anything illegal. The company is defining the numbers it presents with the footnote. And the table discloses SCE. But the company can only do so much. Here's what Snap's adjusted EBITDA would be if SCE didn't exist. By that, I mean if the company paid its employees conventionally, with full-cash salaries. Take a look... [Chaikin PowerFeed] (By the way... don't panic if you see different numbers elsewhere. Creativity rules in the non-GAAP world. Everybody computes things their own way.) As you can see, Snap is still in the red in this metric. That means it's what I recently referred to as [a "failure to launch" company](. And the bottom line is simple... It wouldn't be economically viable if it had to pay its employees with full-cash wages. The bad guidance report earlier this month might seem like Snap's biggest problem. But when we consider SCE, it's clear that the company is in much worse shape than believed. Good investing, Marc Gerstein Market View Major Indexes and Notable Sectors # Hld: Bullish Neutral Bearish Dow 30 +1.01% 8 15 7 S&P 500 +1.46% 111 276 112 Nasdaq +1.82% 28 45 26 Small Caps +0.65% 466 971 395 Bonds -0.27% Energy +4.34% 5 16 0 — According to the Chaikin Power Bar, Small Cap stocks are somewhat more Bullish than Large Cap stocks. Major indexes are mixed. * * * * Top Movers Gainers [rating] AMZN +10.36% [rating] CVX +8.90% [rating] GWW +8.30% [rating] URI +5.85% [rating] TSLA +5.78% Losers [rating] INTC -8.56% [rating] CHD -8.56% [rating] VFC -8.01% [rating] EW -6.29% [rating] PG -6.18% * * * * Earnings Report Reporting Today Rating Before Open After Close GPN, ON ANET, MPWR J AFL, ATVI, CF, DVA, DVN, FANG, L, MOS, SBAC, SPG, VNO, WMB No earnings reporting today. Earnings Surprises [rating] CHTR Charter Communications, Inc. Q2 $8.80 Beat by $1.68 [rating] PSX Phillips 66 Q2 $6.77 Beat by $0.92 [rating] CVX Chevron Corporation Q2 $5.82 Beat by $0.79 [rating] LYB LyondellBasell Industries N.V. Q2 $5.19 Beat by $0.49 [rating] GWW W.W. Grainger, Inc. Q2 $7.19 Beat by $0.58 * * * * Sector Tracker Sector movement over the last 5 days Energy +10.22% Utilities +6.51% Industrials +5.73% Discretionary +5.22% Information Technology +5.10% Real Estate +4.92% Materials +4.09% Financial +2.93% Health Care +1.98% Staples +1.76% Communication +0.68% * * * * Industry Focus Mining Services 7 18 8 Over the past 6 months, the Mining subsector (XME) has outperformed the S&P 500 by +24.06%. However, its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #11 of 21 subsectors and has moved up 8 slots over the past week. Indicative Stocks [rating] CDE Coeur Mining, Inc. [rating] EVA Enviva Inc. [rating] NEM Newmont Corporation * * * * You have received this e-mail as part of your subscription to PowerFeed. If you no longer want to receive e-mails from PowerFeed, [click here](. You’re receiving this e-mail at {EMAIL}. 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