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Expect an Extreme Reaction in SNAP Stock Following Earnings

Will Healy

Snap (NYSE:SNAP) stock will release its earnings report on Tuesday, July 23 after the bell. Since December, SNAP stock has outperformed all but three stocks in the market as companies flocked to their ad platform and user growth returned.

Snap Stock

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Still, SNAP stock has risen to a high valuation and remains volatile. Also, if past quarters serve as an indication, earnings reports tend to inspire extreme moves in the stock. Given that reality, I would stay out of Snap going into earnings.

SNAP Earnings Expectations

Wall Street expects Snap to post a loss of 10 cents per share. If SNAP stock meets earnings estimates, that would be an improvement from the same quarter last year, when the company lost 14 cents per share. Wall Street also forecasts revenues of $359.56 million. That number is 37.1% higher than the revenue figure for second quarter 2018 when the company brought in $262.26 million.

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Historically, earnings reports have significantly moved the stock in previous quarters. The Q1 report led to a 6% decline in SNAP, and that was a tame reaction for this equity. SNAP earnings have usually inspired extreme reactions in previous releases. The Q4 report sent the equity higher by 22%. It also saw an 11.3% decline following Q3 2018 earnings and a 7.3% after last year’s Q2 report.

Snap Stock’s Dramatic Turnaround

This time last year, Snapchat looked destined to become the next MySpace. The platform could not grow its user base and could not attract beyond the teen and young adult user base. Moreover, unlike Twitter (NYSE:TWTR), it had a design vulnerable to copycats. It seemed like just about any feature that Snap launched became quickly co-opted by Facebook (NASDAQ:FB).

However, the company redesigned its platform. As our own James Brumley pointed out, some users bristled, but advertisers loved the platform. Top and bottom-line growth began to turn around. In the first quarter, the company again saw growth in its user base as the active user count rose to 190 million, four million more than the previous quarter.

Still, it could take a stellar earnings report to send SNAP upward. Since bottoming at $4.82 per share in December, Snap stock has nearly tripled in value.

This has left SNAP stock with an elevated valuation. Consensus estimates do not forecast a profit in the foreseeable future. Also, at current prices, Snap trades at around 15.5 times sales. Consequently, many have turned either neutral or bearish on the stock. Luke Lango refers to the rally as “likely in the rear-view mirror.” James Brumley claims that analysts are “turning bullish at the top.”

Brumley also mentions that Snapchat stock became the fourth-best performer in 2019. This earnings report could influence whether it stays in the top five.

The Bottom Line on SNAP Stock

Considering the history of SNAP stock, I would expect an extreme move after earnings. It also looks more likely to fall than rise. The management of Snap, Inc has finally found a way to derive significant revenue growth and a return in interest to the platform. This helps to explain why it has risen from below $5 per share to the $14.50 per share price range in seven months.

However, with an elevated sales multiple and profitability still far into the future, SNAP stock looks fully priced at these levels. Given this possibility of a huge swoon, I would not want to own this equity when management announces earnings.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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