Is the Snap Inc (SNAP) Stock Bounce for Real?

I didn’t go anywhere near Snap Inc (NYSE:SNAP) when it went public back on March 2, and I haven’t been in it since. In fact, I’m not shorting stocks these days, but if I were, I told my employees that SNAP stock is one I would short the heck out of from the get-go.

Is the Snap Inc (SNAP) Stock Bounce for Real?
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The first two days of trading would have gone against me, but by the third day, Snapchat’s parent was already below its opening price of $24 and on its way down to $18.90 two weeks later.

I said the same thing about Facebook Inc (NASDAQ:FB) for months back in 2012. In fact, I was very public about it, appearing on CNN several times telling people to avoid FB stock for quite some time, then urging them to buy right near the bottom later in the year. (Here’s my appearance in July 2012 when I said I would buy Facebook if it fell into the teens.)

Snap Snapped — Just Like Many Other IPOs

The surge-then-swoon is actually a fairly predictable phenomenon with a lot of big tech IPOs.

You have all sorts of crazy hype, and that attracts people who may not normally invest because it’s the cool stock to own. Unfortunately, they don’t take the time or have the knowledge to determine if it is actually a smart stock to buy. The stocks often run higher at first, and then the air comes out. And then the first earnings report as a public company tends to result in more selling.

It did with Facebook, and it just did with Snap.

In Snap’s case, the stock quickly shot to a high of $29.44 on its second day of trading, then traded in a pretty wide range between $19 and $24 until just last week when that dreaded first earnings report came out. SNAP snapped (yes, I know), crashing 21% the next day and blowing right through what had been the bottom of its range.

SNAP stock chart

As you can see, it did bounce pretty quickly — clearly a positive — climbing back into its previous range within two days. SNAP stock is now up 15% from its post-earnings low of $17.59.

Bottom Line on SNAP Stock

So is SNAP now for real, or is this latest bounce another head fake?

The honest answer is that it’s too soon to tell. In our NexGen system, we analyze the charts, fundamentals and themes that companies operate in. SNAP falls nicely in the mega-trends of social media and the booming millennial generation, so it passes that test.

However, the charts and fundamentals aren’t quite as positive — at least not yet.

When a company has only traded for two months, its lack of history makes the charts a little less reliable at first. Still, the fact that SNAP reclaimed support so quickly is a positive. A break above the 20-day moving average (the green line), currently at $21.45, would be another good sign if you’re looking at it from a trading perspective.

Fundamentally, there are some big question marks. Snap is still losing money, and Snapchat clearly has an uphill battle against Facebook. That said, if management can figure out how to turn a profit — a familiar question for many new internet-based companies — the stock could turn into a great buy at some point. Revenue was up big in the company’s first report; now it’s about the bottom line and keeping users growing.

As a long-term holding, I would wait for more evidence that management has the money part figured out.

As a trade, I could see buying Snap on a break above its 20-day moving average, and I would recommend having your downside strategy already in place. My suggestion would be to get out if SNAP stock fell below $20.

Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt is currently in the midst of an exciting launch centered around his trademark three-prong investing approach that targets the mega-trends old Wall Street is missing out on. His next-gen investing strategy is delivering enormous profits in stocks and ETFs. Click here for more information on his latest venture.

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