Subscribe to Entrepreneur for $5
Subscribe

Aw Snap!: The Buy Opportunity on Snap Stock is Disappearing Fast

Any weakness in Snap stock should now be viewed as a chance to buy a social media innovator with a demonstrated ability to quickly snap back.

By
This story originally appeared on MarketBeat

Last year Snap (NYSE:SNAP) was on a roll. The isolation induced by the pandemic spurred millions of people around the globe to turn to social media platforms to stay connected. This was reflected in Snap's financial results and its share price which ran above $80 in September.

Depositphotos.com contributor/Depositphotos.com - MarketBeat

As quickly as its users' videos fade from existence, however, a year's worth of gains was erased from Snap stock in less than six months. The inevitable slowdown in growth and concerns over Apple's data collection practices hit hard. Heading into last week's fourth-quarter earnings report, it was at a 52-week low under $25.

Things took another dramatic turn in the wake of the quarterly update. The company behind the popular Snapchat platform posted a surprise profit and showed it is adjusting better than most peers to the Apple conundrum. The stock jumped to an intraday high of $40.65 in a stunning high-volume rally. The unlikely snapback could be the turning point for a company that suddenly seems to have all the right answers.

Why Did Snap Stock Go Up?

One day removed from getting clobbered in sympathy by Meta Platforms' ugly fourth-quarter report, Snap presented a very different picture. Its Q4 results showed that sales were up 42% and a quarterly profit had been achieved for the first time since the company's March 2017 public debut.

Snap's breakout quarter told the market that not only has its global user base swelled to 319 million, but it is handling Apple's privacy rule changes better than other social media players. The iPhone maker recently started requiring that apps receive consent from their users before collecting data around their activity. The shift is of major concern to social media apps which have faced backlash from both users and advertisers.

While Snap has not been immune to these pressures, management noted that its users have been largely compliant in opting in to have their data tracked. More importantly, the company is finding new ways to keep users engaged and make advertisers forget the Apple overhang. Innovations such as augmented reality (AR) shopping features are resonating well with teens and young adults. Meanwhile, the introduction of customizable ads has advertisers excited again about reaching Snap's massive consumer audience.

What Do Snap's Technicals Suggest?

The volume alone was a telling sign that Snap could be set up to go on an extended run. February 4th's 308 million shares were more than 11x the average daily trading activity. There was some selling activity the next day, but the relatively benign volume suggests most buyers are now in it for the longer term.

Snap's big gapper coincided with several bullish technical moves. The relative strength indicator (RSI) and moving average convergence divergence (MACD) indicator made decisive crossovers of their respective moving averages. The Bollinger Band has also sprung from oversold territory to a more favorable reading. A bullish outside bar on the weekly chart also points to a longer-term uptrend.

Although Snap has not quite returned to the all-important 50-day moving average line, based on the momentum in the stock, this appears imminent. The next major market rally will probably propel the stock to the key technical support for the first time since October.

Is Snap Stock a Buy?

Snap seems to be navigating the current economic environment and Apple hurdles quite well. It is coming up with new ways to engage its youthful audience and bring new users to the platform. And when the users come, the advertisers follow.

The unique premise of Snapchat's quick-fire video and picture messaging sits well with the younger crowd which craves connectivity, efficiency, and frankly, shameless self-promotion. It is a business model that works and will continue to be attractive to retailers and other businesses that want to form connections with the future of purchasing power. As such, advertising dollars will continue to flow Snap's way.

In the meantime, the company will keep pumping out new features and products to enrich its powerful community. Investments in AR are accelerating—and this is a field that is in the early stages of growth.

So too may be Snap's profit growth. Last quarter's surprising bottom-line performance was likely the start of many more to come. For the current fiscal year, analysts are forecasting earnings per share (EPS) of $0.53. This implies a forward P/E above 70x, but it may be a price worth paying considering Snap's road to profit growth has just begun.

Since Friday's report, Wall Street analysts have been predominantly bullish on Snap. Key Banc called for accelerating revenue growth over the next two years and several firms raised their target prices. Eleven firms have called the stock a buy including Credit Suisse which raised its price target to a whopping $93.

Any weakness in Snap stock should now be viewed as a chance to buy a social media innovator with a demonstrated ability to quickly snap back.

Entrepreneur Editors' Picks