This Is Where You Should Buy Snap Stock

Shares of Snap Inc (NYSE:SNAP) gave back 5%-plus Thursday and Snap stock is currently down 2.5% in Friday’s mid-day session. By most accounts, Snap is having a bad couple of days. But when you consider that Snap stock rose almost 50% Wednesday, it doesn’t seem quite so bad. The question for many now is, is SNAP stock a buy?

Let’s back up for one second — what exactly got Snap stock moving in the first place? It was better-than-expected earnings, which were reported on Tuesday after the close.

Its per-share loss of 13 cents was 3 cents above analysts’ expectations. Sales of almost $286 million came in about $32.5 million ahead of estimates. Sales were quite impressive in my view, which grew 72% year-over-year. On the user front, Snapchat’s daily active users grew 5% quarter-over-quarter and 18% year-over-year to 187 million.

Honestly, that’s all great. I thought that the quarter was good and Snap stock was deserving of a rally. Perhaps not a 47% rally, though.

Snap’s Fundamentals

Considering Snap’s potent rally, it wasn’t surprising in the least bit to see Twitter Inc (NYSE:TWTR) stock initially jump more than 25% on its earnings results a day later.

At first flying over $34, the stock was on fire. Of course, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) falling 3.75% and 4.22% Thursday cut those initial gains in half. But Twitter turning its first profitable GAAP quarter was a good start and CEO Jack Dorsey, like Snap CEO Evan Spiegel, is hopeful about 2018.

We have liked Twitter since $16, so its run above $30 isn’t surprising. However, Snap’s powerful rally is. Although the user growth and revenue growth was impressive, there are still a lot of concerns here.

For starters, net losses came in at $350 million for the quarter. For the year, net losses came in at a blistering $3.45 billion. Annual free-cash flow was a negative $819 million. Revenue for the year effectively doubled from $404 million to $825 million. However, adjusted EBITDA fell from -$459 million in 2016 to -$720 million this year.

I get Snap is a young tech company taking on the likes of Twitter and Facebook Inc (NASDAQ:FB). But these financials are no good.

Analysts expect 57% sales growth this year and another 52% in 2019. They also expect more losses in each of those years. Worse, Snap stock has a $23 billion market cap and is only expected to generate $1.3 billion in sales this year. 18 times revenue for an unprofitable company?

Facebook may have revenue growth estimates of “just” 36% this year. But it trades at only 9 times 2018 sales and is wildly profitable. Why go with Snap stock?

Trading SNAP Stock

I have never, ever been a fan of Snap stock from a fundamental perspective. To me, I always preferred Facebook because it was best-in-breed. If I was going to get away from FB, I wanted TWTR because I thought the product was more valuable and its valuation was lower.

While we’ve avoided Snap stock as an investment, trading the name is different. We said we’d avoid it because of the fundamentals, but near $13 in late-November Snap stock was looking good.

On the chart, a similar case is developing: $19 could prove to be decent support but $17 should be very strong. Snap stock priced its IPO at $17 and this level has been both support and resistance over the past year. I think if SNAP stock pulls back this far, $17 will hold.

I don’t like chasing stocks that are up 40% in a few days and SNAP will not be an exception. But for interested buyers — for which I am not one — see if you can get Snap stock at $17.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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