Shares of
Snap (NYSE: SNAP) have shown remarkable resilience in recent months as
they’ve snapped a 20% downtrend to once again drive for all-time highs. Like pretty much every other internet stock out there, this past summer has been a good one for them. A 60% drop in March turned into a 240% rally through June. July’s cooling-off period now looks to be nothing more than some healthy consolidation after earnings and there’s every reason for bulls to be excited as we head into the fall.
With social media competitors WeChat and TikTok under increasing pressure from the US government due to their Chinese roots, there’s probably never been a better time to buy American. It’s estimated that upwards of one third of Americans currently use TikTok. So as a ban on downloads for these two apps goes into effect, the likes of Snapchat and even Facebook (NASDAQ: FB) are expected to see a solid increase in traffic.
Fresh Upgrade
On Monday, Guggenheim joined the long side as they upgraded Snap’s shares from Neutral to Buy. It was one of a handful of upgrades from analyst Michael Morris who struck a bullish tone in general on internet stocks that look undervalued. In a note to clients he wrote "at the core, ‘internet’ companies are software development and distribution companies that largely focus on consumer rather than enterprise applications".
Wall Street’s focus has been on the latter in recent months which in his opinion means the former are due some upside. There’s also a chance that investors have underestimated the long-term growth potential in the ad market and "the sustained revenue and profit growth potential."
The bulls will be happy to have some extra weight on their side as they’ve been looking for some positive news that was Snap specific, rather than just negative on Snap’s competitors. There are probably more than a few who are still nervous after the company’s Q2 earnings at the end of July. While revenue was up 17% year on year, EPS was firmly in the red. Wall Street might have been willing to forgive that considering they still beat analyst expectations, but to make matters worse, daily user growth was light.
Daily Active Users
Daily active user numbers are truly the sword that social media companies live or die by. With that context in mind, it makes sense that TikTok’s difficulty is truly Snap’s opportunity. Even as big tech names like Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORCL) consider purchasing TikTok, there’s been some changes. Key influencers, some of them with tens of millions of followers like Charli D'Amelio, have made announcements that they’re “going to be posting on Snapchat more”. It seems fickle that comments like these from social media celebrities can make a stock’s market cap move by billions of dollars but welcome to 2020.
Technically minded investors will note the inverse head and shoulders pattern forming in Snap’s shares. This is one of the most commonly used indicators for a reversal of a downtrend. It adds huge weight to the bull’s case that Snap has effectively been in a long term uptrend since the end of 2018. Notwithstanding the drop last March, shares have continued to show solid resilience in the past two years after showing a serious lack of it in their first two years of trading.
Shares are about a 5% jump away from their all-time high closing price and 12% away from their all-time high traded price, both of which were hit in the first week of public trading back in 2017. With momentum as strong as it is right now, it’s hard to see them not hitting both soon.
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