Snap Stock Has Come Back To Life. What Now?

Snap stock has bounced back strongly on the back of a slew of good news. The question is, what next? Can this rally continue?

There’s finally some good news for Snap Inc (NYSE:SNAP) shareholders. eMarketer, a reputed industry research firm believes that young users will migrate from social media giant Facebook’s (NASDAQ:FB) core platform to Instagram, which it owns, and Snapchat. The report has investors visibly enthused, and this new found enthusiasm took the shape of a solid 7% rally in Snap shares yesterday. The stock is up by a further 2.5% in after-hours trade, and the stock looks poised to approach the psychological $15 mark soon. Now, the question is, can this rally continue? We’ll lay out some key facts so you can decide.

Good News For Snap Stock Investors.

Snap shares have bounced back strongly over the last 7 days. The stock has gained lost ground on 6 out of the last 7 days, backed be positive news from different sources, and on different fronts. For starters, Business Insider reported that some of Snap’s original content initiatives were gaining traction. Snapchat runs an original news show made by NBC called ‘Stay Tuned’, and reportedly, the show has been well received on the platform. According to reports, the show had registered 29 million unique viewers in less than a month. This was seemingly the news that started this rally. The report also highlighted commentary by Snap’s management around Snapchat Discover, a channel of sorts for video content by publishers.

Snap’s management claimed that ‘Phone Swap’, a reality dating show on Discover reaches 10 million unique viewers per episode. Numbers for both shows are impressive indeed. However, investors should note two important points. First, as Business Insider’s Mike Shields points out, most of these numbers come from “partners, Snapchat itself, or unnamed sources.” Basically, none of these numbers are verified or backed by third part measurement partners like Nielsen, comScore or Moat. That’s not to say that these numbers aren’t correct. However, in the absence of a third party certification, some investors may be wary of taking these numbers at face value. After all, even a big platform like Facebook has reported measurement mistakes on several occasions.

Facebook has already roped in third party measurement partners to assuage advertisers’ concerns, and Snap may need to follow suit. More so, given the backdrop of allegations made by an ex-employee of the company, claiming that Snap faked some stats and growth numbers in the run up to its IPO. Surely, Snap would want to rule out the possibility of allegations of this kind as a publicly listed company. Investors often take even unproven allegations quite seriously.

The second thing to consider is that, even if you decide to trust Snap’s numbers, there’s not enough information that can put these numbers in context. Take for instance, the 29 million unique viewers tally. In this case, even a user who watched just one episode for a few seconds and never opened another episode, could be among the 29 million. As for the second show in question, while 10 million viewers per episode is a solid number, we’re yet to understand for how long viewers watched these episodes. Here’s why this matters. Consider this excerpt from a report on NFL viewership on Twitter last year:

“To be clear, that 2.2 million accounts for the total view, or what Nielsen might call the cumulative view, of all the people who tuned in at one point during the game. TV ratings, however, average how many viewers a program had within a specified time frame of about a minute. In this case, that was 327,000 for Twitter, which is up 34 percent from the 243,000 it averaged last week.”

Clearly, there’s a big gap between the top of the funnel number, and the average viewership, primarily because there are drop-offs. That’s bound to be the case with pretty much any form of entertainment or media. And advertisers are most likely to weigh their options based on the average number. So, while these numbers are great, investors might want to wait till they can be verified and put into context. For now, there’s something to cheer about for those who already own the stock.

What Caused Yesterday’s Pop In Snap Stock.

Yesterday’s rally was primarily triggered by a report by eMarketer, which predicted that young users would migrate from Facebook’s core platform to Instagram and Snapchat. Quoting from a CNBC report:

“EMarketer predicts 14.5 million people ages 12 to 17 will use Facebook in 2017, a decline of 3.4% from the previous year, as they migrate to Snap’s Snapchat and Facebook’s Instagram. Monthly Facebook usage among those under 12 and ages 18 to 24 will grow more slowly than previously forecast, too, according to eMarketer.”

This probably is more ‘bad news for Facebook’ than ‘good news for Snapchat’. We’ve seen user addition numbers for Instagram and Snapchat over the last 6 months, and there’s no debate about who’s winning that battle. Even if eMarketer’s predictions come out true, there’s currently no reason to believe that Snapchat will suddenly, for no apparent reason, be able to attract more users now than it did in the last 3 months. On the other hand, Instagram has managed to draw in users in big numbers. The platform has been adding 100 million MAUs every few months, while Instagram’s user growth hasn’t impressed most analysts and investors. Clearly, between the two platforms, we know which one users are picking right now. And if this continues, Facebook won’t necessarily mind all that much, because after all, it owns Instagram. The ARPU (Average Revenue Per User) profiles could be different for Facebook and Instagram, but as long as users are still within the fold, Facebook has a chance to monetize them.

Snap Stock Is Likely To Face Resistance.

Snap stock has entered overbought territory if you go by the Bollinger Bands indicator. The stock price is touching the upper Bollinger Band, which indicates an overbought condition. Further, Snap stock is likely to face strong resistance from its 50 day Simple Moving Average, at about $15.2 per share, which is approximately 5% away. We do not recommend buying Snap shares at the moment, since the fundamentals still look very weak. The risk of buying in right now is also elevated by the 22% rally over the last 7 days, and the resistance ahead. Investors who want to buy the shares might want to wait a while to see if Snap shares are able to break out above the resistance.

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