Snap (NYSE:SNAP) was the last of the “big three” when it came to the earnings of social media companies. Like its peers Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), the company disappointed Wall Street, sending shares lower. As a result, some investors are unsure about SNAP stock, questioning whether they should stay away or load up while the stock is under pressure.
The answer is simple: Stay away. Here are three reasons why you should not buy SNAP stock.
Snap’s Recent Earnings
In its fiscal second quarter, SNAP beat earnings and revenue expectations. Its revenue soared 44% year-over-year to $262 million, and it generated a loss of 14 cents per share, 3 cents per share better than analysts had expected. The company’s net loss of $353 million declined by 20% from a year ago.
Aside from the losses, the headline results aren’t too bad. But, once you delve beyond the headline, the results deteriorate.
While Snap’s daily active users grew 8% YoY, they declined to 188 million versus 191 million in the first quarter. Furthermore, Snap’s free-cash outflow of $234 million widened from $229 million in the same quarter a year ago. On the plus side, the company’s average revenue per user did increase 34% YoY, but it was still just $1.40. Additionally, the company’s revenue guidance for Q3 was also short of expectations. JD expects $265 million to $290 million in sales, well short of the $298.5 million that analysts were forecasting.
In all, the 10% pop in SNAP stock was unwarranted, as Snap needs one of two things to justify the move: solid financials or strong user growth. The sequential decline in users does not portend well for the app redesign that the company is undertaking. I believe that the shares rallied because Saudi Prince Al-waleed bin Talal took a 2.3% stake in the company during the quarter.
SNAP’s Competition
Perhaps the initial 10% jump in SNAP stock would have been more sustainable if there weren’t better options to choose from. In the social space though, both Twitter and Facebook look more attractive.
While each is going through its own issues, I would rather place my hard-earned money with Twitter CEO Jack Dorsey — who is also the CEO of Square (NYSE:SQ) — or Facebook CEO Mark Zuckerberg. Their platforms offer a more sustainable revenue approach, have positive user growth, and are profitable.
Facebook connects the world and is the most powerful generator of advertisements. Twitter offers breaking news and instant commentary on events around the world. I personally feel that those platforms offer more value, particularly at present valuations.
I believe that SNAP is the most expensive of the three.
Click to Enlarge
The red arrow on the chart above highlights the first day of action following the August 7th earnings report, which was announced after the market closed. After closing above its 20-day and 50-day moving averages in the previous sessions, SNAP stock plunged below both marks.
SNAP also dropped below its short-term support near $12.50, a level that became resistance during the following trading sessions. Eventually, SNAP stock fell below its $12 support level as well.
Now below all of its major moving averages and with several layers of downtrend resistance above, the shares are floating in no man’s land. It would not surprise me to see SNAP retest its lows in the $10.50-$11 range, especially if we get a broader market pullback. Otherwise, we need to wait for SNAP stock to firm up, consolidate, and push through some resistance before we can consider buying 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.
