Snap (SNAP) stock fell around 7.9% on Monday after gaining about 5% on September 6.

Why did Snap stock fall?

The decline came after a Bank of America analyst noted a sequential fall in the top US app downloads. According to a CNBC report, which is based on SensorTower data, the download figures have softened in the third quarter compared to the previous quarter.

Reportedly, Facebook (FB) and Instagram’s combined app downloads fell 13% YoY (year-over-year) in the third quarter. The companies’ app downloads have fallen 3% in the third quarter on a sequential basis. Reportedly, other social media apps like Twitter, Snapchat, and Pinterest have witnessed increased downloads in the third quarter. However, the Snapchat non-game app might face a tough comparison in the third quarter compared to the second-quarter levels. Notably, Snapchat was the second most installed app in the US in the second quarter with around 10 million downloads—up 18% YoY.

Although the reason for the declining downloads wasn’t specified, we think that the US markets might have been saturated by mobile apps like Facebook, Messenger, Instagram, Snapchat, or Bitmoji.

Should you buy Snap stock?

Snap stock has been improving since the beginning of 2019 after a rough time in 2018. The stock has returned around 177.86% this year. At the closing price of $15.31, Snap’s market capitalization stands at $21.1 billion.

The company has strong growth prospects due to its strong user base and revenue momentum. The strong user base has driven Snap’s revenues, which beat analysts’ expectations by 7.9% and also grew 48% YoY to $388 million in the second quarter.

Snap’s user base has risen for two quarters after posting sluggish growth for three consecutive quarters. In the second quarter, Snap added 13 million new users. The company added 4 million users in the first quarter. The improved version of Snap’s app and the company’s focus on augmented reality technology fueled the user base growth. Snap’s focus on targeting younger Millennials has also given it an edge over Facebook, which is mostly used by older people.

The recent partnership with Spotify (SPOT) would also boost Snap’s user base. Notably, Spotify users would share music and podcasts directly to friends on Snapchat or Snapchat Stories.

The company is also banking on its mobile gaming business, like its peers, to boost its stock price. Last week, an Evercore ISI analyst upgraded Snap stock due to its gaming business. Evercore analyst Kevin Rippey has an “outperform” rating with a target price of $20 on Snap stock. Reportedly, the analyst expects that Snap will achieve gaming revenues of about $350 million by 2022.

However, the stock is facing competition from Facebook and Instagram. Snap’s user base has been impacted mainly by Instagram Stories, which copied Snap’s stories feature in August 2016. Snap’s redesigned app failed early last year and received criticism. The company’s Spectacles product wasn’t successful.

Future growth projections

Snap expects upbeat revenue guidance of $410 million–$435 million for the third quarter. Analysts expect the company’s revenues to grow 46% YoY for the third quarter. Analysts also expect Snap’s 2019 and 2020 sales to grow 43.7% and 34.1%, respectively.

The company expects better-than-expected DAUs (daily active users) of 205 million–207 million. The expected DAUs would be higher than 186 million users last year.

Snap’s technical indicators

Snap’s 14-day RSI (relative strength index) score is 43.41, which indicates that investors are neutral on the stock. Notably, an RSI reading above 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means that the stock is in “oversold” territory.

On Monday, Snap stock closed near its Bollinger Band lower range level of $15.19. The level signals that the stock is oversold.

Overall, analysts favor a “hold” rating on Snap. Among the 40 analysts, 11 analysts recommend a “buy,” 24 recommend a “hold,” and five recommend a “sell.”

We think that the stock is recovering from headwinds and might perform in the long term. However, the recent sell-off indicates that the company might need more time to recover.

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