Snap Inc (NYSE:SNAP) has been one of the hardest hit by the tremendous pressure currently on the social media space. Facebook Inc (NASDAQ:FB) and their user data scandal is the cause. But SNAP stock and Twitter Inc (NYSE:TWTR) stock have suffered most.
SNAP stock is down 15.3% and TWTR stock is down 19.5% since the news first broke. That compares to a decline of just 13.5% for FB stock.
While it may not be fair, that’s the way it is. But I don’t look at the decline in Snap Inc as a buying opportunity the way I do TWTR. Not even close, actually. If anything it’s set up as a great short candidate.
Let’s look at why.
Trading Snap Stock
I’ve never been a big fan of SNAP, although I’ve identified a few good trades in the past. Most recently though, after shares shot up to $21 post-earnings, I said investors need to see it hold above $17 (black line). Below that and there’s downside risk.
Click to Enlarge
After breaking below $17 in mid-March, Snap stock quickly cascaded lower and briefly fell below $14 on Thursday. That’s where the stock hit some shallow trend-line support (in purple).
In the little blue rectangle, I highlighted when SNAP broke below that key $17 level. Its ensuing price action tried, but failed to get back above it. That was the go-ahead for bears to short this name with confidence. Should trend-line support fail as well in the coming sessions, shorts can increase their position if they want to push their luck and juice their returns.
For now, we have to see how Snap stock handles these two levels — trend-line support and $17. A break above $17 signals that bulls are back in control and bears may want to consider covering their position. Below trend-line support and the stock’s recent lows near $11 becomes a target.
Cash Gone in a SNAP
My biggest problem with Snap stock has always centered around the fundamentals. It seems like CEO Evan Spiegel is finally serious about running a public company. After a tough couple of quarters and a monumental disappointment on earnings and free-cash flow, Spiegel is ready to show Wall Street he’s ready for the big leagues.
Well, Wall Street is a “show-me” kind of place. If he can back up his talk, investors won’t hesitate to gobble up the stock.
Spiegel is reportedly looking to return the company to break-even operations this year — in 2018. However, analysts don’t expect a profitable year anytime soon (GAAP or non-GAAP). For both this year and next year they expect losses and aren’t looking for a profit until 2021. That’s not to say analysts are always right — not even close, in fact — but those calls do not align with Spiegel’s outlook at all. Let’s hope they’re wrong.
Firing a bunch of people is one way to lower the cost though and that’s exactly what SNAP has done. It fired 120 engineers in March and another 100 advertising employees this month. While the company may have over-hired, layoffs doesn’t exactly scream “growth is good.”
The app’s redesign likely didn’t help. I’ll admit, I’m not a huge Snapchatter, but even I’ve noticed a big decline in the amount of stories I see from friends. Kylie Jenner criticized the new design, as did Chrissy Teigen, hurting the stock price. If that’s the case and people really don’t like the redesign, user growth (and likely revenue) could suffer as a result.
That would put even more pressure on the stock price.
The Industry Is Under Pressure
Finally, the entire social media industry is under pressure. Regulations are likely to come down on these companies — even if FB is the only one in hot water right now. Any testimonies, short theses, domestic or overseas regulations and other negative catalysts are likely to hurt the group, not just a single stock.
Need proof? All you need to see is SNAP and TWTR down more than FB to realize that’s the case — and there’s nothing we can do about it but accept 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.
