In the last two months, Snap Inc. (NYSE:SNAP) showed a “double top” at $18 on the charts and recently closed at $17.11. This signals, but does not guarantee, the stock may have peaked and will have trouble breaking past $18. Still, its competitors, including Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) are faring well in 2019, up 48% and 39%, respectively in the year.
Snapchat stock doubled in the year-to-date period, easily outperforming its peers. Shareholders might book gains, after post Q2 earnings trading action is not giving investors more gains. There are a few reasons to at least consider selling the stock even though Snapchat’s long-term prospects are better than ever.
Bank of America noted that Snapchat app downloads fell 18% from Q2. But in Q2 2019, downloads grew by 1.6 million. It is normal to expect the pace of downloads to fall after a strong quarter.
In the upcoming holiday quarter, expect the higher user base count attracting more advertising dollar. That will catch analysts off-guard and might end the dip hurting SNAP stock price.
Strong Momentum After Second Quarter
Snap reported revenue growing 48% YoY to $388 million. It is making $1.91 in revenue from each user, up 37% from last year. Gross margin also increased sharply to 46%, up from 30% last year. Bears may fault Snap for losing $53 million in the quarter but this is still an improvement from its $305 million in operating losses last year.
Snap added 13 million DAUs (daily active users) in Q2. DAUs improved in all of its geographic regions – North America, Europe, and Rest of World. If users sent 7% more snaps after the app update, investors may confidently expect usage growing at a faster rate during the holiday period.
Technological Developments
The company launched the next generation of AR lenses last quarter. It has a powerful deep neural network that modifies a person’s appearance in real-time. Just two weeks after its launch, over 200 million users tried these new Lenses. Snap added games in the period, a move that should strengthen user connections. It also developed its Snap Kit further, which will allow its partners to bring Snapchat features into their services. Snap noted in its Q2 presentation that 11 apps were in the top 100 of the iOS App Store and Google Play Store.
For advertisers, testing for Instant Create began. If it is successful, it will generate effective ads for businesses in a few steps. And Snap Select will let advertisers run un-skippable commercials within Snap’s show programming. Increased engagement in Discover plus running un-skippable, 6-second commercials will help the company drive ad revenue.
Risks for Snapchat Stock
Facebook continues to add features that could lure Snapchatters away. Its Instagram unit will have a messaging app companion called Threads. This will let users share more details, such as location, speed, and battery life to a few close friends. Yet if users do not want such information stored and saved in Facebook’s databases, they will not use this new Instagram feature.
Snap’s August 7 announcement of an upsized, $1.1 billion convertible senior notes offering due in 2026 is a negative development. It reminds investors that even though the company is growing revenue, it is still losing money. Still, this cash infusion should give the company sufficient time to continue operating and reaching profitability.
Your Takeaway
Snap’s valuations are higher than that of Facebook and Twitter but the company continues to grow its user base at a brisk pace. The fair value of Snap stock could be below the current price. It might also offer more upside if the company reports revenue growth of at least 45% this year. So, investors holding Snapchat stocks should continue doing so. Fundamentals are getting stronger, giving investors the confidence that the stock will move towards new highs.
