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?
Ten years ago the founders of Snap had an idea to change the way photos and videos were displayed in the booming social media field.
They came up with the idea of a social media app where users can post photos and videos that disappeared from the site in about 10 seconds. They honed in on the idea that younger social media users didn’t want their social history coming back to haunt them.
And they were right. It wasn’t long before 50 million “snaps” were being posted each day, with millions of new users downloading the app.
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.
Facebook Offered To Buy Snapchat
Facebook (FB) CEO Mark Zuckerberg liked Snapchat so much he offered to buy the company in 2013 for $3 billion. Snap Chief Executive Evan Spiegel said no thank you.
Then, in 2017, Snap scored big with its eye-catching initial public offering 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.
Snap now has 281 million daily active users, as reported in the company’s first quarter earnings report. That was 16 million new users from the prior quarter.
Revenue jumped 66% from the year-ago period to $770 million, topping estimates of $743 million. It was Snap’s best quarterly revenue growth in three years. The same is true of user growth of 22%. 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.
Snap stock jumped 8% on the report. 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,” Spiegel told analysts in the conference call. Furthermore, he said. “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.”
For its second quarter, Snap expects revenue in the range of $820 million to $840 million. The midpoint of $830 million is above analyst estimates of $827.3 million.
It also generated positive free cash flow for the first time as a publicly traded company. And, for the first time, the number of Android users on Snapchat passed Apple (AAPL) iOS.
In its early years as a public company, Snap became a big target of Facebook, with its competing Instagram platform. Facebook began to routinely copy the most popular features on Snapchat and applied them to Instagram.
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 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.
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.
In mid-May, Snap introduced its first augmented reality smart glasses called Spectacles. The company previously released camera-embedded sunglasses under the same name. But the new Spectacles aren’t for consumers yet. The company is making them available to software developers to see what sorts of applications they can create with them. Applications for AR technology include navigation, education, games, commerce and more.
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 96 out of a best-possible 99. The rating means Snap stock currently outperforms 96% 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 92. 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.
Is Snap Stock A Buy Now?
As of the market close on June 23, Snap stock has moved into buy territory.
Snap stock has tried to break out into a buy range several times since mid-April, but continued to hit resistance and pulled back while it consolidated. That resistance point was established on April 14 at 65.86. That puts the current buy point at 65.96 out of a small cup-with-handle formation, extending to 69.26. Snap stock closed at 66.35.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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