Will Snap Inc (NYSE:SNAP) stock stop falling? Several people asked me this question yesterday. This question embodies what the new Wall Street has become. Investors have no tolerance for red ticks. Even though SNAP stock rallied more than 50% in one day, we still can’t accept a partial pull back. After two relatively weak days of retracement, it’s suddenly a disaster in the public opinion.
Because of the massive rally it had, today’s write up is not bullish in the short term. I would have been more positive if it hadn’t just gone ballistic on its earnings.
The fall in sympathy to Meta Platform’s (NASDAQ:FB) earnings was silly. But since it has already rallied extensively, I would temper the enthusiasm a bit for now.
This is especially true if you consider a mid-term time frame. The sellers have steadily sold it down 50% in a bearish channel since October.
Conversely, I won’t be outright bearish, and would not recommend shorting it. SNAP stock still holds a prosperous future in the long term. The company has been executing well on its plans — a fact that is supported by its financial statements.
Snap’s current revenues are 2.5 times larger than 2019. Also gross profits are 3 times as big as within the same timeframe. They’re getting better at managing their business.
SNAP Stock Is a Compelling Investment
While Snap Inc is not yet profitable, its management has improved its net loss line item. Therefore, SNAP stock has a reasonable price-to-sales of 15x. Clearly SNAP can do better, but this metric will normalize if the growth continues at this rate. Meanwhile, the company should just focus on its execution rather than profitability. (As an example, Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) proved that this method works).
What’s also important in this case is that Snap has a positive cash flow from its own operations. This frees management to do what’s necessary without needing to borrow. This is an important point in a rising rate environment. The Federal Reserve is starting a quantitative tightening cycle soon. Perhaps this could be as early as March, when they end their quantitative easing program. They are under pressure to control inflation, and they have delayed it as much as possible.
Last week’s strong jobs report did not provide relief for them on that front. In the end, higher rates are not a deal breaker for buying stocks. The investment thesis behind SNAP stock remains viable on its own. Our world has changed, and it’s not likely to reverse anytime soon. Facebook already announced its next step forward into the metaverse. Most likely all other social media companies, including Snap, will follow it.
The Trend Is Snap Inc’s Friend
There’s plenty of innovation left for SNAP to accomplish. With today’s tech, programming skills and artificial intelligence, I bet the company can do it. Besides, investors who sell quality stocks because of rate hikes are making a mistake. It would be smarter to use simple logic and current facts. If the profit and loss statement is improving this well, I doubt that a few percentage points higher in the overnight lending rate is going to break it.
Until the facts change, investors should not expect a material change in the long-term opportunity in SNAP stock.
However, investors should remain cautious. Dips in SNAP below $32 per share make fine partial entry opportunities. We must also account for the external risks from the many potential headlines looming. Using options provides alternative ways of profiting on the bullish side. For example, instead of buying 200 shares, I can buy 100 and sell one put. This way, half my investment would have room for error if adversity hits.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
