Up more than 15% in the last three trading days, Can Snapchat parent Snap Inc (NYSE:SNAP) stock continue to march higher?
Shares of Evan Spiegel led Snap Inc (NYSE:SNAP) just had one of the best periods of gains since their debut on the Wall Street earlier this year. Snapchat parent Snap Inc stock is up more than 15% in the three trading sessions on account of a bullish call by Credit Suisse. We had earlier suggested in our coverage that things don't look much better for SNAP stock ahead. There is little doubt that SNAP stock trades at steep valuations. However, the latest bullish call has offered some hope for SNAP bulls, the question now is: Can Snap stock sustain the momentum to march higher?
Snap stock is heavily overvalued.
Snap bulls are buoyed by Credit Suisse analyst Stephen Ju's call who raised his price target from $17 to $20. He is very optimistic about the company's third quarter earnings. According to his estimates, the Snapchat has reached better than expected user growth in Q3 surpassing the last quarter numbers by 3.2 million. Ju belives Snap's revenue and earnings would come above expectations for the third quarter. However, despite Ju's bullish thesis, he expects Snap Inc to become profitable by only 2022. This indeed happens to be to long a time frame and doesn't inspire much confidence with Facebook (NASDAQ:FB) breathing down its neck.
SNAP stock currently trades at a price to sales multiple of 31.1, almost 5x the industry average. The sales multiple is almost double that of Facebook which has multi-billion dollar revenues and at the same time profitable. With no profitability in sight for the next few years and rising competition, we believe that it is highly unlikely that Snap stock can sustain the steep valuations.
Investors are also quite optimistic about Snapchat's new Context Cards feature through which users can view their friends’ Snaps and see information about any businesses visible in their photos. Some analysts like Morningstar's Ali Mogharabi suggest this is a very good attempt by Snap to monetize its user base and this feature could be very useful for many brands and advertisers. However, we believe it is still early days to be bullish about this feature and it always carries the risk of being copied by Facebook's Instagram. Facebook has the resources and wider context to come up with a significantly better feature by improving Snapchat's feature.
Can SNAP stock sustain the momentum?
Given the steep valuations and the broader negative sentiment on SNAP stock, it is difficult for SNAP stock to continue to march higher from here. The uptrend could only get a big boost in case of a short squeeze. The latest short interest data released last week clearly suggests that there is no slowdown in rising short interest in SNAP stock. Short Interest in Snap Inc stood at 108.33 million shares on September 29 increasing by another 4.3% from the preceding reporting date. As a percentage of float, short interest came in at 22.3% of the float reaching a new all-time high. The days to cover also stood very high at 5 days. The high short interest in Snap shares makes them an ideal candidate for a short squeeze in case of a further rally from here.
However, the technicals do not entirely fall in place for SNAP stock. The Snap Inc stock technical chart is suggesting some key insights. The technical chart infers that the stock has entered overbought territory as per popular momentum indicator Bollinger Bands. The share price has breached the upper Bollinger Band to flash an overbought signal. The Relative Strength Index (RSI) indicator reading is also just below the standard overbought threshold limit of 70 at 67.32, so it is just a matter of time before the stock is in overbought territory as per both RSI and Bollinger Band indicators, which is generally considered as a strong signal. All this implies, that the upside from here could be limited.