Sandy tells SpongeBob about the Christmas traditions, and he tells the whole town about Christmas. The residents of the city, all except Squidward, become convinced that Santa Claus will come and fulfill their wishes, but soon they stop believing Santa. Not waiting for Santa, SpongeBob is disappointed, and Squidward laughs at him. Later, he becomes ashamed of his behavior, and he changes into a Santa Claus costume to cheer SpongeBob up. All residents of Bikini Bottom become aware of the arrival of "Santa" and Squid has to give away all his belongings as Christmas gifts. At the very end of the cartoon, the real Santa appears, and Squidward begins to think that he has lost his mind.
P.S. Santa was probably on drugs.