2023-11-21 08:30:00 ET
Summary
- Snap Inc. has experienced significant volatility since going public in 2017, with frequent boom-and-bust cycles a common occurrence for shareholders.
- The stock is currently down more than 80% from its peak, as the company struggles to compete with larger competitors like Meta.
- Despite decent DAU growth and a recent rally, the stock is overbought and likely to correct lower due to persistent user monetization issues and a strongly overbought condition.
- We think the stock could remain depressed for some time.
- We rate SNAP a "Sell".
Snap Inc. (SNAP) has been public for nearly 7 full years.
In that time, investors have been on a wild ride, as the second-fiddle social media company has gone through several boom-and-bust cycles.
In 2017, when the stock first premiered, SNAP was riding high on a wave of confidence, IPOing at a stratospheric 44x sales multiple - something that the company hasn't touched since.
Following the IPO, the multiple took a dive, coming back down to earth while the stock languished, down more than 80% (from peak to trough) at times.
Then, again, in 2020 and 2021, the company saw a massive boom as users exploded during the pandemic, and the stock went on a market-beating, ~1,000% run, measured from market lows to highs:
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However, the rally didn't last, and since then the stock is down more than 80%, again , as the company continues to struggle to acquire and monetize users as effectively as larger competitors like Meta ( META ):
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Thus, the natural question; what's going to happen next?
While the company has enjoyed a small rally over the last few weeks following an earnings release that the market has cheered, we think the stock is severely technically overbought and due to correct lower. The company's fundamentals, while improving, are still rough , and the recent exuberance has likely gotten ahead of itself.
We think it's time to trim.
Let's dive in.
Fundamentals
While the second section will cover the various ways in which SNAP is overbought & set to correct, here's some context from a fundamental standpoint.
Right now, SNAP is a highly unprofitable social media/camera company that continues to dilute shareholders:
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While the top-line valuation has come in somewhat and revenue has remained stable, the combination of a lack of top-line revenue growth, plus unattractive net margins and a growing share count paint a bleak picture.
Curiously, here's what management had to say about the deceleration in sales growth:
First and foremost, you're right, we had a quarter in Q3 that we're pretty pleased with on the progress we made on top-line. There's a lot that went into that. We had a number of drivers to that outcome, including the progress we've made on our direct-response ad platform. We continue to make really significant investments in the ad ranking and optimization, incorporating a much broader range of signals into the ad platform and driving much larger models. And we've also instituted a much faster pace of experimentation. All of that's leading to more precise conversion predictions, improved ROI for advertisers.
Reminder: the company's YoY revenue was 5%. If this is something that management is pleased with, then there may be some cultural issues at the company, despite the macro environment. Remember, Meta and other social media platforms have seen much less impact from the macro on ad spend.
Even Pinterest ( PINS ), which has had its own share of issues over the last year, saw more than double YoY top-line growth.
This is no compounding machine, like Lowe's ( LOW ) or BlackRock ( BLK ).
However, some cheered the recent earnings report, since which the stock has rallied more than 25%:
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The reason? DAU's continue to trend in the right direction:
Statista
Given that the company's revenue formula essentially boils down to "(users * monetization)", continued growth is good news for the company's top line. However, the picture is challenged overall, as the company currently floats more than $1.3 billion in TTM net losses. Much of this is due to SBC, but nagging under-monetization issues are also present. This is the main reason that the stock has traded in a sideways range for more than a year.
Recent earning trends also paint a bleak picture:
Yes, DAUs are up, but SNAP hasn't been able to sustain any sort of consistent EPS or revenue growth pattern, which is hampering multiple expansion in the name.
When taken together, and with the steadily diluting share pool, fundamentally, the stock seems to be in a weak position; definitely not something we would want to own as a long-term investment.
Technicals
That said, the recent rally has been strong. The post-earnings rally saw SNAP stock jump more than 25% to make new quarterly highs.
However, this recent rally may be on its last legs, with shares set to revert lower. Let's examine the stock through a Volume, Trend, Volatility, and Mean Reversion lens to get a better understanding of what's likely to happen next.
Volume
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As you can see, volume spiked into and during earnings, and the post-earnings-announcement-drift has seen declines in earnings, dipping most days below the average shares traded per day of around 29.3 million. Commonly, when rallies begin running out of steam, volume is the first component to go.
Trend
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From a trend standpoint, the stock has seen recent green candles as a result of the recent rally, which is to be expected.
However, zooming out, you can see that SNAP's ADX is very high at a reading of 47, which indicates that the underlying trend in the stock is very, very strong:
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Why is this a problem?
Well, in short, the trend is your friend until the end.
In other words, SNAP hasn't been able to sustain a trend reading much higher than ~47 for any length of time over the last few years, even with the massive ~1,000% run.
This suggests that the current rally may soon run out of steam.
Volatility
On the volatility front, realized volatility has been dropping over the last year+, as the stock has languished.
Some may view this as a positive; that SNAP is a sleeping dragon just waiting for a breakout to move significantly higher. However, in reality, volatility tends to cluster.
In other words, things in motion tend to stay in motion, and things at rest tend to stay at rest.
While the stock has seen some recent action, in the bigger picture, the trend is still bearish when it comes to potential further gains in SNAP.
You can see the shorter-term vol average above (the darkest line, measuring 1.91), already coming down as well. If SNAP were going to make a massive move, there would be ample time where the stock sets up better at the top of its range.
Mean Reversion
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Finally, we come to the mean-reversion outlook.
SNAP stock is extended to the upside when compared to the historical deviation of the recent linear regression of price action. You can see this on three separate timeframes as well. This is denoted above by the white channels that are overlaid on historical price action.
Notice how SNAP's stock is trading right at the top of these three ranges.
Additionally, the stock is firmly overbought, with an RSI reading of 73, and our MDD indicator, which measures how far a stock is from 'normal' price action, is extended, showing SNAP trading more than 10% above 'average' pricing.
The last time these signals were overbought like this, the stock dropped from ~$14 to ~$8.50, in July.
Summary
When combined with the fundamentals, the different technical lenses we touched on are all pointing to lower prices for SNAP over the coming weeks and months. Potentially even for the next year.
Some may cheer the recent earnings report, but it seems highly likely that trimming at present prices is the right thing to do, especially if you're already long, or already up on a position.
There are some risks to this thesis, especially if SNAP can dramatically improve user monetization. However, it seems that the company has already pulled all of its possible levers to achieve this, which means that in our mind the risk is to the downside here.
Don't agree? Let us know in the comments why.
Cheers!
For further details see:
Snap: Look Out Below