Snap, Inc. (NASDAQ:SNAP) stock has rallied around 30% from its all time low despite the disappointing earnings report.
Finally, some good news for investors in Snap Inc (NYSE:SNAP) stock. Shares of Snap Inc, parent of Snapchat, bounced back above the crucial $15 mark in yesterday's trade. Snap stock is up almost 30% since it closed at an all time low of $11.83 on August 11th. However, the stock is still down 38% from its closing price on the listing day. This means that, if you had bought the stock anytime around the IPO date, you would still be in the red despite the recent rally. Snap stock had hit the all time low after Snapchat reported worse than expected quarterly results. The company added fewer than expected daily users, generated lesser revenues and reported higher than expected losses. However, in spite of this all round disappointment, Snap stock has gained significantly since the results.
What is driving the rally in Snapchat stock?
There are several factors which could have driven this rally in Snap stock. Before the beginning of the current rally, shares of Snap Inc had lost over 50% from the close on the first trading day. Many investors believed that the correction was overdone and the stock had bottomed out. The stock got a boost after Business Insider reported that some of Snap's original content initiatives were gaining traction. Snapchat runs an original news show made by NBC called 'Stay Tuned'. According to reports, 'Stay Tuned', an original news show on Snapchat, made by NBC, had registered 29 million unique viewers in less than a month. Snapchat management also claimed that 'Phone Swap', a reality dating show on Discover reaches 10 million unique viewers per episode. These were pretty decent numbers.
This was followed by a report from eMarketer which said that Facebook's US teen users are leaving the social media giant for Snapchat and Instagram. The report said that Facebook's monthly user base among the 12 to 17 age group will fall 3.4% vs. 2016 to 14.5 million people."We see teens and tweens migrating to Snapchat and Instagram. Both platforms have found success with this demographic since they are more aligned with how they communicate—that is, using visual content. Outside of those who have already left, teens and tweens remaining on Facebook seem to be less engaged—logging in less frequently and spending less time on the platform," said eMarketer's senior forecasting analyst Oscar Orozco. Winning users from Facebook was definitely a good news. Short investors taking profits and the news of founders not selling their shares this year also contributed to the rally.
Snap stock makes a bullish crossover.
Technical charts are also warming up to snap stock. During yesterday's trade, Snap stock made a bullish crossover above its 50-day moving average line. The 50-day moving average line had provided some strong resistance in the past. Last week, the stock had retreated after testing the resistance from the 50-day moving average. Yesterday's bullish crossover accompanied by higher volumes indicates that the rally still has strong momentum. Snapchat stock had also made bullish crossover above the 20-day moving average a few days earlier. Providing further strength to the rally, Moving Average Convergence Divergence has also made a bullish crossover. Technical analysis suggests that the rally still has strength left.
Should you buy Snap stock or take profits?
Given the recent rally and continued momentum, is it time to buy Snap stock? Well, not really. On the contrary, if you are currently holding the stock, it might be time to book profits, partially at least. While technical analysis suggests that the rally in the stock still has some strength left, the fundamentals will keep the price in check.
Snapchat is facing tough competition from Facebook, its subsidiary Instagram, and Twitter. Instagram, especially has done a lot of damage to Snapchat. The resounding success of "Instagram Stories" which Instagram ironically copied from Snapchat has made Instagram one of the favorite platforms for marketers as well as users. Instagram will continue its rapid growth at the expense of Snapchat.
Snapchat is currently trading at 29x its last twelve months revenues and 11.2x its expected 2018 revenues. Given the stiff competition and the heavy losses, this is a very expensive valuation. Snapchat has never made a profit and according to Morgan Stanley, they are not likely to do the same till 2021. The company has reported staggering losses in its first two-quarters as a public company, with a Q2'17 net loss of $443 million and a cash burn of over $400 million in the last two-quarters. Poor growth numbers so early in its growth cycle, mounting losses and the premium valuations (29x TTM sales), make SNAP stock a highly risky play.
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