After an Epic Rebound, Snap Stock Could Test Investors

Social media firm Snap (NYSE:SNAP), the owner of the Snapchat social network, is one of 2019’s most obvious redemption stories. After slumping for much of its life as a public company following its March 2017 initial public offering, Snap stock has more than doubled in 2019.

Snap Inc (SNAP) Stock: The Gains Will Be Ephemeral

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On Thursday, Snap stock jumped 7.13% on volume that was nearly 50% above the daily average after newly public rival Pinterest,(NYSE:PINS) forecast 2019 revenue of $1.055 billion-$1.08 billion, roughly in-line with the $1.06 billion analysts, on average, were expecting.

That was a one-day sympathy rally, but Snap stock has had some credible winds at its back this year. Snap reported a first-quarter loss of 10 cents per share on revenue of $320 million, much better than the loss of 12 cents per share on revenue of $306 million that analysts, on average, had expected.

“Snap offered second-quarter revenue guidance of $335 million to $360 million, putting the midpoint slightly ahead of an analyst projection for $345.5 million,” according to Barron’s.

Not Everyone’s Convinced

While the  redemption of Snap stock this year is irrefutable, some analysts and investors remain skeptical about Snap Inc stock. That is an easy posture to have after a stock more than doubles, but more importantly, Snap faces multiple competitive threats from the likes of Facebook Inc. (NASDAQ:FB), Twitter (NYSE:TWTR) and Pinterest, among others.

Plus, Snap stock trades at 12 times its  sales and seven times its book value, multiples that are higher than the comparable metrics on Facebook, a profitable, mega-cap company.

The average analyst price target on Snap stock is about $11.50, nearly exactly where the stock closed on May 17. Some analysts are not so optimistic.

JPMorgan Chase analyst Doug Anmuth recently reiterated his Underweight rating on Snap stock. Looking at some of the price targets that are above where Snap currently resides, those analyst forecasts imply upside of just 5%-10% from current levels.

Conversely, some analysts are more optimistic about the shares of the social media firm.

“As a result, we believe Snap is likely to become profitable over the next five years. We are maintaining our $14 per share fair value estimate for Snap,” said Morningstar. “After rising more than 140% from its 52-week low in December to its $12 range currently, the stock is trading in 3-star territory and we recommend waiting for a wider margin of safety before investing in this no-moat and very high uncertainty brand.”

And for the uber-bullish, RBC analyst Mark Mahaney believes Snap Inc stock can surge all the way back to the magic number of $17, its IPO price.

The Bottom Line on Snap Stock

Snap stock has recently encountered some lethargy. Even with its big pop on May 16, the shares are down about 2% in May.

Adding to the case for caution towards Snap stock, the company still is not profitable, and as the spate of recent “unicorn” IPOs suggest, Wall Street does not have the patience it once had for money-losing social media and technology companies. By some estimates, Snap will not break even on an EBITDA basis for another two years.

The near-term bottom line for Snap stock is that it could be vulnerable to some profit-taking, but the company is retaining younger users and growing that base and has some potentially compelling initiatives underway. Consequently, investors who want to be engaged with the social media stock right now can consider buying a small amount of Snap stock.

As of this writing, Todd Shriber does not own any of the aforementioned securities.

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