Snap (SNAP) Sells Off Though Support After Mixed Quarter

Snap Inc. (SNAP) stock is trading lower by nearly 7% on Wednesday morning after the company reported a second quarter 2020 loss of $0.09 per share, beating consensus estimates by a penny. Revenue rose 17.1% year over year to $454.2 million, also beating expectations, but no third quarter or fiscal year 2020 guidance was presented due to uncertainty as a result of the COVID-19 pandemic. The company's net loss grew to $326 million, up nearly 30% compared to 2019.

Key Takeaways

  • A growing user base failed to translate into a quarterly profit for Snap.
  • The camera and social media company expects slumping ad revenue for the rest of the third quarter.
  • The mid-$20s now mark a dividing line between bullish and bearish power.

Daily Average Users (DAUs) increased 17% year over year to 238 million, with sequential growth in all major geographical and device categories. CFO Derek Anderson told analysts that long-term investments drove higher losses while the user surge reported during first quarter shutdowns has "gone away." He also warned that historically high third quarter advertising demand has failed to materialize due to major disruption in back-to-school and sporting categories.

Wall Street consensus currently rates Snap as a "Moderate Buy" based upon 19 "Buy," 8 "Hold," and 1 "Sell" recommendation. Guggenheim downgraded Snap stock to "Neutral," and other rating cuts could follow. Price targets range from a low of $16 to a Street-high $30, while the stock is now trading about $3 below the $26 median target. This placement looks about right, given mixed quarterly results.

Monthly active users (MAU) is a key performance indicator (KPI) used by social networking and other companies to count the number of unique users who have visited a site within the past month. Websites generally recognize monthly active users via an identification number, email address, or username.

SNAP Daily Chart (2017 – 2020)

The company came public at $24 in March 2017 and posted an all-time high at $29.44 just one day later. The subsequent reversal cut through the IPO opening print and gathered downside momentum before bottoming out at $11.28 in August. A counter-trend wave into February 2018 stalled in the low $20s, printing the next leg of a head and shoulders pattern that broke the 2017 trading floor in September.

Aggressive sellers took charge throughout the fourth quarter, dumping the stock to an all-time low at $4.82, while a bounce into 2019 made excellent progress. Even so, the initial rally wave didn't reach the 2018 high, keeping the downtrend fully intact. A January 2020 breakout also failed before completing the 100% retracement, yielding a breakdown and decline to a 13-month low during the pandemic-driven panic.

Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.

Snap Short-Term Outlook

Committed bulls finally took control in mid-March, generating a V-shaped recovery wave that stalled just under the January high in May. Snap stock completed the task in June and broke out, mounting the IPO opening print before settling about three points under 2017's all-time high. Ominously, this morning's downdraft has dropped the stock through the opening print once again, reinforcing strong resistance in the mid-$20s.

A Fibonacci grid stretched across the 2017 into 2018 downtrend places that contested level right at the .786 retracement, also reinforcing resistance. As a result, that's the most important price to watch after the opening bell and in coming sessions. On the flip side, the stock needs to hold support at the 50-day exponential moving average (EMA), now rising at $21.75, in order to maintain the bullish technical outlook because price action has held that level since April.

The on-balance volume (OBV) accumulation-distribution indicator now favors a bullish outcome, lifting above the February 2018 peak into an all-time high. However, an OBV decline through the red line would shift the equation in favor of sellers, especially if it coincides with a breakdown through the 50-day EMA. Conversely, price and volume posting new highs in coming sessions should set the stage for a test at the 2017 high and potential breakout.

The Bottom Line

Snap stock has sold off after a mixed second quarter 2020 earnings report and is trading below key resistance at $24.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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