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Forget About Snap Stock Until the Next Earnings Report

Snap stock could make a comeback, but take a wait and see approach

By Luke Lango, InvestorPlace Contributor

Snap Stock: Why Would Its CFO Resign So Abrutly?

Source: Shutterstock

Once Snap (NYSE:SNAP) stock broke below $10, it was game over. Ever since Snap stock closed below $10 for the first time on Sept. 6, selling pressure has intensified like never before. In the month since, the stock has shed 22%.

Why the huge sell off? Because the narrative and the stock are both temporarily broken.

Social media sentiment broadly remains weak. So does digital advertising sentiment. Specific to Snap, most signs point to low engagement for the company’s ads, while usage seems to be gradually shifting to Instagram.

Analysts continue to downgrade SNAP. Insiders are still selling more than they are buying. And, the stock doesn’t have any technical line of defense to provide any support. It is trading well below all of its moving averages, and the Relative Strength Index (RSI) has been in oversold territory for a month now.

In other words, Snap stock has turned into a falling knife. What should investors do with falling knives? Stay away.

In the big picture, I think Snap stock has huge upside from current levels given the company’s highly engaged 200 million user base. But, Snap won’t realize that potential upside until management proves a successful and sustainable monetization trajectory. Management won’t get an opportunity to do that until the next earnings report, which is due in November.

Until then, investors should throw in the towel on Snap stock. Given depressed sentiment and bad optics, this stock won’t go higher until a fundamental catalyst changes the narrative.

The Fundamentals Are Weakening

At the core of the Snap stock sell-off are weakening fundamentals for the trendy social media app.

Snap is done growing from a user base standpoint. That is pretty much a given at this point in time. User growth has stagnated for the past several quarters, and actually dropped sequentially last quarter. Snap looks full up at 200 million daily users.

Thus, revenue growth going forward will have to come from improved monetization rates. But, early reads on monetization trends aren’t promising. The one thing that makes Snapchat different than Instagram and other Stories apps is P2P photo messaging.

This also happens to be the part of Snapchat that people use the most (the left side). But, Snap is busy monetizing Stories and Discover (the right side). Not only is engagement low on that side, but Snap’s core demographic of teen users hate the ads that pop up in Stories and Discover.

Thus, one can assume that conversion and engagement rates for Snap’s ads aren’t great right now. So long as those metrics remain “not great”, Snap will have a tough time competing for ad dollars in a digital ad industry that is already slowing.

Beyond monetization, Snap appears to be losing ground to Instagram in terms of both growth and engagement. The whole social media space has been weak lately, with Facebook (NASDAQ:FB) and Twitter (NASDAQ:TWTR) both weak as of late, too.

Indeed, you could drag Google (NASDAQ:GOOG) into the mix and say all of digital advertising is out of favor with Wall Street. Plus, Snap stock still trades at nearly 10X trailing sales, which is bigger than all of the FANGs besides Netflix (NASDAQ:NFLX).

Overall, the narrative is just really bad at Snap right now.

The Technicals Are Broken

Snap stock is dropping like a falling knife for two reasons. First, the narrative lends itself to a rapidly falling share price. Second, there is no technical line of defense providing support for a reversal.

Snap stock has already broken all of its moving averages. The 200-day? It’s up at $13.50. The 100-day? Around $11.50. The 50-day? Just below $11. The 5-day? Just above $8. Snap stock trades well below $8, meaning it is well below all of its moving averages.

Moreover, Snap stock’s RSI has been in oversold territory for a month now, and yet, Snap stock has dropped more than 20% during that stretch. In other words, this stock has been technically oversold for a long time, and it continues to drop.

The technicals on Snap stock are broken. Thus, this stock won’t reverse course until a fundamental catalyst arrives to change the narrative. That won’t happen until the next ER. Until then, Snap stock should be avoided.

Bottom Line on SNAP Stock

If Snap can figure out how optimally monetize its highly engaged 200 million user base by incorporating ads into messaging, then Snap stock has potential to hit $15. But, the company hasn’t figured that out yet, and as such, this stock won’t take off like a rocket ship any time soon.

Instead, the stock will remain weak for the foreseeable future, and nothing about this falling knife will change until the next ER.

As of this writing, Luke Lango was long FB, TWTR, GOOG, and NFLX. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/forget-snap-stock-earnings-report/.

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