Social media firm Snap (NYSE:SNAP) will lay off approximately 500 employees or 10% of its global workforce. Almost immediately, SNAP stock fell sharply. Since 2022, Snap layoffs have represented a rather burgeoning development. Also, the headcount reduction within the technology ecosystem clashes with the broader bullish sentiment for the U.S. economy.
According to a CNBC report, Snap anticipates that it will incur charges ranging from $55 million to $75 million, based on a regulatory filing. In November, the company trimmed a small number of employees in the products division. However, the last major Snap layoffs occurred in August 2022, when 20% of the staff was impacted.
“We are reorganizing our team to reduce hierarchy and promote in-person collaboration. We are focused on supporting our departing team members,” a Snap spokesperson told the news agency.
According to The Verge, almost 30,000 workers in the technology sector have been let go this year. In January alone, nearly 24,000 workers received pink slips, per CNBC. Further, some of the largest companies in the space have announced job cuts, including Microsoft (NASDAQ:MSFT). Also, late last month, PayPal (NASDAQ:PYPL) stated that it would reduce its headcount by 9% in a bid to cut costs.
Snap Layoffs Force a Rethink in the Bullish Narrative
Naturally, one of the counterpoints of the Snap layoffs is the performance of the underlying U.S. economy. Late January, the fourth-quarter GDP print came in at a 3.3% annualized rate, well above Wall Street’s estimate for a 2% gain. More recently, the January jobs report represented a blowout, according to Barron’s, with payrolls expanding by 353,000. That’s twice what economists had forecasted.
Therefore, it’s not shocking to see that the Snap layoffs contradict the broader bullish narrative. Still, one major explanation is that the underlying Snapchat app is highly dependent on digital advertising spend. As CNBC mentioned, the company stuttered in some quarters, though it managed to snap a streak of revenue declines in its most recent quarter.
On the pessimistic side, the Snap layoffs signal a warning that advertisers are not confident about the current momentum sustaining itself. Still, the rise of impulse spending suggests that advertisers across the board could boost their programs to capture discretionary dollars.
For now, though, market participants have seen enough. According to Fintel’s options flow data — which filters exclusively for big block transactions likely made by institutions — major entities bought several put options. Also, they sold high volumes of call options, which represent high-risk wagers that the target security will not rise above the listed strike price.
Why It Matters
Right now, analysts rate SNAP stock as a consensus moderate buy. However, this assessment may come under threat, which breaks down as seven buys, eight holds and one sell. Notably, the last two ratings — from Benchmark and Evercore — were “holds.” Overall, the average price target comes in at $17.92, implying almost 9% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
