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Snap’s Spectacular Rally May Put Bears On The Defensive, But For How Long?

Published 21/06/2019, 03:11 pm
Updated 09/07/2023, 08:31 pm

Snap Inc. (NYSE:SNAP) has surprised analysts this year by staging a powerful rebound. After hitting the lowest level since its 2017 initial public offering in December, the operator of the popular Snapchat app has surged about 192%. The magnitude of this rebound has investors wondering if the worst is over for its stock.

Snap’s shares’ continuing march to the upside is particularly surprising as this happened during a period in which large social media companies, including Alphabet’s (NASDAQ:GOOGL) and Facebook Inc. (NASDAQ:FB), face increasing threats of regulatory and antitrust probes.

Snap Price Chart

The one big trigger for the rally in the photo-sharing app's shares is that teenagers, who make up the bulk of Snapchat’s user-base, are returning after the company’s controversial redesign last year.

In its latest earnings report in late April, Snap showed that user numbers had stopped shrinking — revenue growth was better than expected, rising 39% in Q4, and the Snapchat added 4 million people daily users.

With some signs of momentum in the company’s user metrics, some analysts are also liking the new features Snap has recently introduced. Snap’s games platform and new augmented reality features that let users add graphics to their hands, feet or bodies have been very popular in recent months. These features are in addition to the app’s face-distorting lenses, and a gender-swap lens that turns a man face into woman, and vise versa.

"The latest launch of lenses is among some of the most impressive product innovation we have seen in some time from the company," said Pivotal Research’s Michael Levine in a recent note, after upgrading Snap to buy from hold with a price target of $17.25 . "This in our opinion constitutes real innovation in augmented reality," he said.

Social Media Giants’ Regulatory Troubles

Snap’s improving financial and user metrics have no doubt played a big role in its stock’s outperformance this year, but the regulatory oversight that the big social media companies are facing is another big positive for Snap. An app with a clear and defined audience and with little room for misuse is in a much better position to withstand potential regulatory changes globally than behemoths like Facebook and Google — the social media companies that some politicians want to break.

YouTube, owned by Google’s parent Alphabet, was mulling moving all videos for children to its separate YouTube Kids app, according to a report in The Wall Street Journal this week, as the site struggles to convince parents and advertisers that it can protect children from violent, upsetting and harmful content.

If the pressure on the social media giants mounts, as many analysts predict, it may make Snap more appealing and could revive takeover rumors that provided some floor to the extreme movements of its share price since the IPO.

Bottom Line

Snap, in our view, remains a highly volatile stock and not suitable for long-term investors due to its uneven user-engagement record, escalating costs, and a higher turnover among its top executives. Despite the stock’s recent rebound, it's still trading almost 13% lower than its $17 IPO price, closing yesterday's session at $14.83. Instagram, owned by much bigger rival Facebook, continues to pose an existential threat to Snap that's unlikely to go away.

Due to these uncertainties, it’s too soon to assume that Snap’s recovery has taken hold. That being said, Snap stock is becoming attractive for contrarians due to some positive catalysts mentioned above, especially with a growing possibility of a takeover bid.

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