I’ve struggled with some stocks in the past — who hasn’t? — but Snap Inc (NYSE:SNAP) hasn’t been one of them. I’ve been lucky enough to pick a few good spots to buy, despite hating the fundamentals. For the most part, though, I’ve spent my time chastising Snap stock as being overvalued and not worthy of investors’ money.
So, where does that leave us now?
I still don’t like Snap stock based on its fundamentals, which we’ll get into. But from a trading perspective, SNAP doesn’t look all that bad. Shares soared some 50% in early February after the company reported earnings. The results were better than investors were expecting — obviously — but the rally was simply too much.
Snap stock ultimately fell 20% before finding support. Where it found support wasn’t surprising to anyone who read my most recent Snap piece. I wasn’t sure that Snap would fall to $17 because it was up near $21 at the time. But if it did, my thesis was that the company’s IPO price would hold as support.
Trading Snap Stock
Snapchat stock finding support at $17 confirms that this level should hold up in the future. Since August, Snap has been putting in a series of higher lows. On the chart, this is highlighted by the blue trend line. Support is drawn with a black line.
The 200-day moving average is still pointing lower, but both the 100-day and 50-day moving averages are moving higher. Momentum, which is measured by the MACD (blue circle), isn’t overwhelmingly bullish, but it’s not too bearish either. In short, we have some mixed signals, but bulls have reason for cautious optimism.
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Playing it here, investors can buy now and use a significant close below $17 as their stop-loss. They can also wait for a closer retest of the $17 level. I personally favor the latter of the two, given that Snap stock isn’t giving much conviction on where it’s heading. So long as $17 holds as support though, the odds favor Snap stock retesting its recent highs near $21.
Investors should pay attention to the SNAP stock price. In this case, the technicals outweigh the fundamentals given the egregious valuation Snap carries. We need more direction on Snap before we can confidently take a position.
A Snapshot of Snapchat
Snap has continually underperformed expectations, missing revenue estimates in three of its four earnings reports. Although, it did beat earnings expectations the last two quarters. Late last week, reports said Snap laid off about 120 engineers. While this will reduce costs, it raises concern about the company’s future growth. Further, users did not like Snapchat’s redesign. The criticism, made famous by a Kylie Jenner tweet, may not bode well for user growth and engagement.
CEO Evan Spiegel is apparently pushing for break-even results in 2018. That’s a real reach in my mind, given that free-cash flow came in at negative $827 million for the last 12 months. Ultimately, the company lost $3.4 billion in 2017 (when it went public) and $515 million in 2016. It would be surprising if the company gets back into the black this year.
Plus, at what cost will break-even operations come at? High-growth companies have to toe a tight line. They can’t have egregious losses, but, at the same time, they need to continue fueling top-line growth. A slowdown in revenue or user growth will not be well-received by Wall Street.
For the record, analysts are not looking for the company to turn a profit for the next three years. On the plus side, analysts expect Snap to generate sales in excess of $1 billion this year for the first time.
Valuing Snap Stock
Either way, Snap stock is very expensive. Shares trade at 27 times last year’s revenue and almost 17 times 2018 revenue. While it has faster growth than Twitter Inc (NYSE:TWTR), one could argue that Jack Dorsey’s social media company is the better value and has strong momentum.
While its stock is struggling, Facebook Inc (NASDAQ:FB) is better than both of them and has impressive profitability.
The bottom line? Don’t own Snap, just consider trading it.
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.
