Wall Street Rally Pauses After Underwhelming Revenue Forecasts

February 6, 2019 Updated: February 6, 2019

NEW YORK—U.S. stocks edged lower on Feb. 6 as videogame makers gave disappointing revenue forecasts and investors awaited developments on U.S.-China trade relations.

The benchmark S&P 500 and the Nasdaq were weighed by declines in shares of Electronic Arts Inc, which tumbled 13.3 percent after the videogame publisher forecast full-year revenue below Wall Street estimates. The sharp drop pulled down shares of rival videogame publisher Activision Blizzard Inc, which fell 10.1 percent.

Shares of industry peer Take-Two Interactive Software Inc also dropped sharply, 13.8 percent, after the company’s similarly underwhelming forecast.

The slump in videogame stocks contributed to a 1.5 percent decline in the S&P 500 communication services sector, the largest drop among the S&P’s major sectors.

Despite the fall, Wall Street’s indexes remained near two-month highs. A 7.3 percent gain in the S&P 500 would put the index above its record closing September high.

“The market is feeling a little exhausted after we’ve had a nice run in January and early February,” said Nathan Thooft, global head of asset allocation at Manulife Asset Management in Boston.

Investors cited a void of catalysts for market gains.

“Trade talks are probably the thing that’s really intriguing to the market, but that’s in March,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh, referring to the deadline for the United States and China to reach a trade agreement before additional tariffs go into effect.

The Dow Jones Industrial Average fell 21.22 points, or 0.08 percent, to 25,390.3, the S&P 500 lost 6.09 points, or 0.22 percent, to 2,731.61 and the Nasdaq Composite dropped 26.80 points, or 0.36 percent, to 7,375.28.

Oh Snap

Shares of Snap Inc rose 26 percent on Feb. 6, after the maker of Snapchat messaging app arrested a fall in users on Apple devices and drew a series of favorable reviews from analysts for its progress with a new Android app.

Snap faced criticism last year for a botched-up redesign of its messaging app and millions of users left the platform. Users peaked at 191 million in the first quarter of last year.

The company reported 186 million daily active users at the end of December, steady compared to three months earlier and beating Wall Street expectations of $184.91 million. It said it expects no decline in users in the first quarter of this year.

“We are taking comfort in the iOS user stabilization, (but) the more important product development for us will be the release of the Android app to help reignite user growth,” Credit Suisse analysts wrote in a note.

At least 11 brokerages raised their price targets on the stock.

Snap Logo outside NYSE
Front of the New York Stock Exchange (NYSE) with a Snap Inc. logo hung up shortly before the company’s IPO in N.Y. on March 2, 2017. (Lucas Jackson/Reuters)

The targeting of Android users is a change of tune for Chief Executive Officer Evan Spiegel, who prioritized development on the Apple ecosystem through its stock market launch in 2017.

Analysts said that if Snap can repair the reputation of the Android app on what is now the world’s main mobile operating platform, its user growth may return.

Jefferies analysts said, “2018 was the year of exodus from both employees and users on the platform, but we believe that Snap is turning the corner in ’19 and that will help investor sentiment improve throughout the year.”

However, several analysts said they would wait for further signs of improvement in Snap’s business before calling it a turnaround story.

Out of 37 who cover the stock, still only three have “buy” or higher ratings on the stock, 24 are on “hold” and 10 have a “sell” rating.

Shares of Snap were up $1.84 at $8.88 on the New York Stock Exchange.

Trade Talks

U.S. Treasury Secretary Steven Mnuchin said trade talks with China last week were “very productive” and confirmed that he and other officials will travel to Beijing for the next round of meetings.

Federal Reserve Chairman Jerome Powell will speak on Feb. 6 at 7:00 p.m. ET in Virginia.

Though the major indices drooped, the Philadelphia SE Semiconductor Index advanced 2.6 percent. Shares of Apple supplier Skyworks Solutions Inc jumped 11.5 percent after the company announced $2 billion in stock buybacks, while shares of Microchip Technology rose 7.3 percent after the company suggested the chipmaker industry was close to recovery from its recent downturn.

Shares of Capri Holdings Ltd, formerly Michael Kors, climbed 11.3 percent after the fashion company posted a better-than-expected quarterly profit and raised its revenue forecast.

Anadarko Petroleum Corp shares slid 7.4 percent after the oil and gas producer’s fourth-quarter profit missed analyst estimates.

Declining issues outnumbered advancing ones on the NYSE by a 1.50-to-1 ratio; on the Nasdaq, a 1.09-to-1 ratio favored decliners.

The S&P 500 posted 17 new 52-week highs and two new lows; the Nasdaq Composite recorded 39 new highs and 17 new lows.

Volume on U.S. exchanges was 6.70 billion shares, compared to the 7.50 billion average over the last 20 trading days.

By April Joyner and Supantha Mukherjee

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