Should You Buy SNAP Stock Despite the Earnings Whiff?

Near big-time support, Snapchat stock is looking attractive on the long side

Not long ago, Snap (NYSE:SNAP) was on the verge of a breakout. Shares were flirting with a move over $18 before turning lower after a strong run. Normal price action, most investors thought as Snap stock was simply digesting the recent gains.

Although currently out of favor with Wall Street, Snapchat stock technically looks solid.
Source: Christopher Penler / Shutterstock.com

Turns out a lot more downside was coming than what many were planning for.

When the company reported earnings on Oct. 22, investors were hoping it would spark a turnaround. Instead, shares sank despite a top- and bottom-line beat. Weaker-than-expected guidance was the culprit and the 20% beating in Twitter (NYSE:TWTR) two days later didn’t help sentiment.

Down almost 30% from its highs just a month ago and totally out of favor on Wall Street, is now the time to get long Snapchat stock?

Fundamentally, Probably Not

Anyone who has even loosely followed my work on InvestorPlace knows I’m not a big fan of Snap stock. CEO Evan Spiegel is not my favorite leader and I have been critical of the company’s financials.

Given that this was a single-digit stock not all that long ago, this stance seems appropriate. Snap still isn’t where I’d like to see it from a business standpoint, but it’s improving.

The company still lost money last quarter. However, a loss of 4 cents per share was a penny better than expectations and moving in the right direction from steeper losses a year ago. Revenue surged almost 50% year-over-year to $446 million and topped estimates by more than $10 million.

More importantly, user growth and cash flow are moving in the right direction. The former was up 13% year-over-year to $210 million. Operating cash flow jumped more than 40% to a $76 million deficit, while Snap’s free cash flow (FCF) deficit was nearly halved from the same period a year ago. FCF went from -$158.8 million in third-quarter 2018 to -$84 million in Q3 2019.

Again, these numbers aren’t ideal, but they are finally moving in the right direction. The business has momentum, even if Snapchat stock doesn’t.

The Street didn’t like Snap’s guidance, but I thought it was solid. Management expects daily active users of 214 million to 215 million versus estimates of 208 million, and sales of $540 million to $560 million versus Street expectations of $553.6 million. The midpoint is a little short of consensus views, but not by much.

Further, management expects EBITDA of $0 to $20 million, a big improvement from the $50 million deficit in Q4 2018. Again, Snap’s financials aren’t perfect, but they’re moving in the right direction.

Trading Snap Stock

I’m not a raging bull in Snap stock — not by any means. I am simply recognizing that its user growth and financials are moving in the right direction and that the stock is presenting a favorable risk/reward setup.

chart of Snap stock

On Oct. 24, shares pulled back to the 200-day moving average and promptly reversed higher. As if a reversal weren’t enough to get investors interested, the big breakout near $12.50 was just below the session low. Further, the stock was also able to reclaim the 61.8% retracement.

So, what does all this mean?

After falling from $18-plus in September, shares have come down quickly. Earnings are out (and they’re not bad), while support has shown up exactly where we want it to. A close below $12.50 ruins the bullish trade and puts the 50% retracement on the table.

However, if support sticks, then $15 to $15.50 could be the next stop, where the SNAP stock price will find its 50-day and 100-day moving averages, as well as its 78.6% retracement.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/should-you-buy-snap-stock-despite-the-earnings-whiff/.

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