Snap Falls after an Impressive Rise: What’s to Come?

Snap (SNAP) stock is down by over 1% during in trading session today. The fall in the stock follows a 6.79% jump on September 17. The stock surged on the day after an analyst ended his bearish call on the company. Analyst Shyam Patil of Susquehanna upgraded his price target and rating on Snap stock. Susquehanna has increased its rating to “neutral” and is no longer negative on the stock. Patil has also raised its price target from $12 to $18. He’s betting on Snap’s ad business and growing user base.

Snap has also recently been upgraded by Evercore ISI. On September 3, Evercore analyst Kevin Rippey raised his rating to “outperform” from “in-line” and increased his price target to $20 from $18. The analyst was optimistic about the company’s efforts to expand in the mobile gaming segment.

Optimism about the company’s user base and efforts to boost its business has increased analysts’ and investors’ confidence. At its closing price of $16.83 on September 17, Snap was trading 8.3% below its 52-week high of $18.36. The stock was also trading around 249% higher than its 52-week low of $4.82.

Snap stock has gained more than 200% this year. The stock has also outpaced peers Facebook (FB) and Twitter (TWTR) and the broader markets. While Facebook has gained 43.5%, Twitter has gained 50.5% YTD (year-to-date). The S&P 500 is up 19.9% YTD.

So should you buy the stock now, or it is too early to bet on Snap’s growth momentum? Let’s try to understand the factors that are driving the stock and the threats that may be ahead.

Snap’s growth drivers

Snap is gaining revenue on the back of its daily user growth. The rise in its user base drove its second-quarter revenue up 48% YoY. The company added 13 million daily users in the quarter following the addition of 4 million daily users in the preceding quarter. It seems users liked Snap’s updated app. Its recent partnership with Spotify could also be acting as a positive catalyst for user growth.

The company has also been focusing on augmented reality technology and its mobile gaming business to drive ad revenue.

For the upcoming quarter, Snap expects its number of daily users to be in the range of 205 million–207 million. The forecast is significantly higher than its 186 million daily users in the same period last year. Snap also expects its third-quarter revenue to rise in the range of $410 million–$435 million.

Snap stock is trading at a premium

Snap stock is trading at a premium valuation to its peers Facebook and Twitter. It’s trading at a trailing-12-month EV-to-revenue (enterprise value-to-revenue) ratio of 15.78x. Facebook’s and Twitter’s trailing-12-month EV-to-revenue ratios, on the other hand, stand at 7.79x and 8.95x, respectively.

Snap’s premium valuation doesn’t look compelling, as we don’t see growth in the company’s revenue going forward, which is a concern. Analysts expect its third-quarter sales to rise 45.9% YoY. In 2019 and 2020, analysts expect its sales to rise 43.7% and 34.1%, respectively.

Stiff competition from Facebook

Snap faces competitive pressure from Facebook, which has a vast user base. Facebook’s number of daily users increased 8% YoY to 1.59 billion in the second quarter. Back in 2016, Facebook copied Snap’s Stories feature and launched Instagram Stories. Facebook’s and Instagram’s large user bases crushed Snap’s user base for several quarters. Snap users also revolted after the company released its app redesign early last year.

Snap also competes with Facebook in the mobile gaming business. Snap Games announced its first original game, Bitmoji Party, in May, followed by Tiny Royale, which was produced by Zynga. Facebook, on the other hand, launched Instant Games in 2016. Instant Games can now be accessed through the Gaming tab on Facebook’s app. Facebook users can also play FarmVille on the platform.

Analysts have revised their views on Snap stock

Looking at the past three months’ worth of analyst ratings, we can see that analysts have gradually moved from “sell” to “buy” ratings on the stock. However, the majority of analysts covering Snap still have “hold” ratings on its stock.

Currently, around 11 out of 40 analysts have “buy” ratings, 25 have “holds,” and four have “sells” on the stock. Snap analysts have a 12-month target price of $16.57 on the stock. On September 17, the stock was trading at a premium of 1.6% to analysts’ 12-month target price. Its median target price was $17.00 on the same date.

Reading the technical levels

Snap’s 14-day RSI (relative strength index) score is 58.92, which indicates that investors are neutral on the stock. An RSI reading of above 70 indicates that a stock is “overbought,” while an RSI level of below 30 suggests that a stock is “oversold.”

On September 17, Snap stock closed near its Bollinger Band upper range level of $16.67. This value suggests that the stock has been overbought.

We believe the company could continue to grow higher if it maintains its user growth and invests in new technology and products. The company’s growth efforts could also help it to stay ahead of its peers. However, we prefer the watch-and-wait method of approach for Snap stock in the near term.