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3 Reasons for Snap Stock Investors to Worry This Week

Rick Munarriz, The Motley Fool

One of this year's hottest stocks is Snap (NYSE: SNAP), and on Tuesday afternoon it steps up with its first-quarter results. Analysts are holding out for a smaller loss than the prior year on a 32% surge in revenue.

Snapchat's parent company has momentum on its side. Its stock is rolling, and it has beaten Wall Street's bottom-line targets for three consecutive quarters. Analysts are rallying behind the stock, but things could still go wrong this week. Let's go over three things that can break Snap's stride.

Snapchat's ghost mascot as wall art at Snapchat headquarters.

Image source: Snap.

1. Snap has already more than doubled in 2019

Snap is one of 2019's most unlikely turnaround stories. The shares are up 112% so far this young year, and Snap is the largest U.S. company by market cap to have more than doubled in 2019. 

Momentum is a wonderful thing, but with great gains come great expectations. If Snap shares want to avoid buckling into the single digits again later this week, it will have to do than simply beat Wall Street estimates. With all the air under the stock in recent months, even a somewhat decent report could be a disappointment. 

2. History isn't kind

Snap is volatile during earnings season, and the unfortunate news for those long the stock is that things usually don't work out for them. Snap has offered up eight quarterly results as a public company, and it has suffered sharp declines in all but two of them.

  • Q1 2017 -- down 17%.
  • Q2 2017 -- down 10%.
  • Q3 2017 -- down 18%.
  • Q4 2017 -- up 37%.
  • Q1 2018 -- down 24%.
  • Q2 2018 -- down 3%.
  • Q3 2018 -- down 8%.
  • Q4 2018 -- up 32%.

It's probably just a coincidence that the only two times Snap stock has moved higher following an earnings report was during the fourth quarter. The good news is that the two times the stock did move higher, they accounted for the two overall biggest moves up or down, with 37% and 32% increases. 

Eight quarters is a small sample size, but Snap needs to alleviate concerns that its worst performance came the quarter after its blowout gain a year ago. History had better not repeat itself.

3. There's too much riding on monetization

User growth has stalled for Snapchat. There were 186 million daily active users when the year began, just below the 187 million from a year earlier. The company is still recording double-digit percentage gains, but that's because it's getting better about milking more value out of its free users.  

Many of the analyst upgrades and Wall Street pros jacking up their price targets are looking at third-party data that shows marketers flocking to Snapchat. Some of the more bullish analysts also report that Snapchat's making headway with improvements to its Android app, hoping to overcome the poorly received update that roughed up the platform's growth more than a year ago.

If anything in Snap's report suggests that monetization isn't continuing to improve, or that Snapchat is doing worse than losing just a few net stateside users, we could see the shares give back a good chunk of this year's heady gains.

Momentum is on its side, but history is not. Your move, Snap. 

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.