Snap (SNAP) recently reported a better-than-expected earnings report for the first quarter and gave a second-quarter outlook that also exceeded expectations. Is Snap stock a buy?
With its first-quarter earnings report, Snap delivered revenue of $770 million, topping expectations of $743 million. That was up 66% from the year-ago period and its best quarterly revenue growth in three years. Also, it reported a break-even quarter, or adjusted earnings of zero cents a share. Analysts expected Snap to report a loss of 21 cents.
For its second quarter, Snap expects revenue of $820 million to $840 million. The midpoint of $830 million is above analyst estimates of $827.3 million.
Quarterly revenue jumped 66% from the year ago period. That was its highest year-over-year growth rate in three years. The same is true of user growth. The company added 15 million daily active users in the quarter. It also generated positive free cash flow for the first time as a publicly traded company.
Also for the first time, the number of Android users on Snapchat passed Apple (AAPL) iOS.
Ongoing Investments, Improved Performance
“A lot of this growth has been unlocked through our ongoing investments in improving the performance and stability of our products across a wide variety of regions and devices,” Chief Executive Evan Spiegel said in written remarks with the Snap earnings announcement.
Spiegel went on to say, “Furthermore, as our user base continues to grow outside the United States, we are evolving our team and operations to be able to more nimbly and effectively support our global community.”
Based in the Los Angeles suburb of Santa Monica, Calif., Snap is the owner of Snapchat. It’s a smartphone app that can manipulate and enhance images and videos in numerous ways, which can then be sent to other Snapchat users. It also has an expanding lineup of video content and games and is popular with the under-30 crowd.
Snap scored big with its eye-catching initial public offering in 2017 that raised $3.4 billion and gave it a market valuation of $23.8 billion. That made Snap the largest U.S.-listed IPO among tech companies since Facebook (FB).
Snap stock soared 44% on its first day of trading but the party didn’t last long as Snap stock plunged the following day and continued falling for months, descending to a record low of 4.82 by December 2018.
Part of the problem was that Facebook began to routinely copy the most popular features on Snapchat and applied them to Instagram, the photo- and video-sharing service Facebook bought for about $1 billion in 2012. Facebook tried to acquire Snap in 2013 for $3 billion but was rejected. Snap also faced some execution issues while numerous key employees departed.
Snap Turns A Corner
But just when it seemed the wheels were falling off, Snap turned a corner with a fourth-quarter 2019 earnings report that blew past expectations. Wall Street took notice and Snap stock began to take flight.
Then came the pandemic, which knocked back stocks across the board in March as companies tried to gauge the impact on their business. Snap stock plunged to a 13-month low.
The good news for Snap was that during this period of uncertainty advertisers and agencies began auditing and analyzing social media platforms to help determine where best to place their money. That helped Snap expand its advertiser relationships. Snap also saw a rapid growth in demand from brand advertising partners in addition to strong demand from direct response advertisers.
Moreover, a reorganization of the company’s sales team enabled Snap to shift resources more quickly, providing increased efficiency and flexibility.
Big Jump In Snapchat Users
Demonstrating the popularity of Snap, daily active users in the first quarter quarter jumped 22% to 280 million, it’s best growth in three years.
Snap has stitched together a lengthy series of new products and services over the last few years. This includes Snap Games, a live multiplayer gaming platform. It also added more augmented-reality features to its Snapchat platform. And it expanded a line of original shows designed exclusively for its Snapchat audience. The company also added mapping features.
Another feature on Snapchat is a page called Discover. It’s basically a news feed that provides original content from news publishers. It now includes programming that feature pop culture, celebrities, doctors, teachers, workers and others citizens who share their experiences. Long gone are the days of Snapchat being used just to connect friends.
Technical Analysis Of Snap Stock
A technical analysis of Snap stock is a key component of determining whether it’s worth buying.
The IBD Stock Checkup tool shows that Snap has an IBD Composite Rating of 92 out of a best-possible 99. The rating means Snap stock currently outperforms 92% of all stocks in terms of the most important fundamental and technical stock-picking criteria. The best stocks will often rate 98 or 99 at the time they launch a big price run.
It has a Relative Strength Rating of 93. The rating shows how a stock’s price performance over the prior 52 weeks holds up against all the other stocks in IBD’s database. Look for stocks with a rating of 80 or higher.
However, the stock’s relative strength line is sliding. It tracks a stock’s performance vs. the S&P 500 index. Typically, the RS line of the strongest stocks is either confirming or leading a stock’s price into new high ground.
Snap has a Accumulation/Distribution Rating of B+. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling. A grade of A signals heavy institutional buying. The lowest rating of E means heavy selling. Think of the C grade as neutral.
Is Snap Stock A Buy Now?
Snap stock is currently not a buy but keep an eye on it. The stock has more than doubled since a breakout in early October and is extended. But since hitting a record high of 73.59 on Feb. 24, Snap stock has formed a cup-with-handle base with a buy point of 65.96. The buy-point range extends to 69.25.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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