Snapchat Stock Up 5% in October – Time to Buy SNAP Stock?

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The price of Snapchat stock is up more than 5% so far in October only days ahead of the release of its financial results covering the third quarter of its 2021 fiscal year – an event that is scheduled to take place on 21 October.

Comment volume about Snapchat stock has been steadily surging on the popular Wall Street Bets Reddit channel and it is currently standing at 2.75% of the messaging board’s total posts.

Considering Snapchat’s track record of positive earnings surprises, this monthly advance may reflect the positive expectations that investors are having for this upcoming Q3 2021 release.

Can Snapchat keep living up to its reputation of shattering analysts’ estimates? In the following article, I’ll be digging deeper into the latest developments concerning the company to outline plausible scenarios for the future.

Snapchat Stock – Technical Analysis

snapchat stock
Snapchat (SNAP) price chart – 1-day candles with multiple indicators – Source: TradingView

Snapchat’s price action has been finding support at the price gap left behind back in July this year when the company smashed Wall Street’s forecasts for its Q2 2021 financial results. Back in September, we stated that any bounce off this threshold would be positive for the stock price and that has been the case thus far.

Aside from that, the stock continues to be embarked in a long-dated upward price channel that started in November last year.

Momentum readings for SNAP stock are showing a fading post-earnings tailwind as the Relative Strength Index (RSI) has posted a series of lower highs since the July jump while the MACD has hovered multiple times near negative territory and is also on a downtrend.

Snapchat Stock – Fundamental Analysis

In past occasions, user base growth has been the most important catalyst for Snapchat. Therefore, analysts will probably keep an eye on this variable for this upcoming report. Daily active users (DAUs) from the platform have grown from 46 million to 280 million from Q1 2014 to Q1 2021 at a compounded quarterly and annual growth rate of 6.7% and 24.5% respectively.

During the previous quarter, the company reported total DAUs of 293 million resulting in a 4.6% quarterly jump and a 23% year-on-year increase. Based on the firm’s historical performance, Snapchat should report DAUs between 305 and 310 million for the stock to remain on an uptrend.

Another important variable to keep an eye on is Snapchat’s average revenues per user (ARPU). During the last quarter, this figure jumped to $3.35 resulting in a 76% year-on-year increase.

For this upcoming quarter, based on our 310 million DAU estimate and the management’s revenue guidance, this figure should land at approximately $3.5.

Moreover, according to the management’s guidance, revenues should land at around $1.07 – $1.09 billion while the firm’s adjusted EBITDA should range between $100 and $120 million.

All of these factors could affect the performance of Snapchat stock once the company’s earnings results are out.

As of last Friday, the price of options expiring this week showed that traders are expecting a 5.8% move in the price of Snapchat stock following the release of this Q3 2021 earnings report.

Using the firm’s forecasted revenues of approximately $4.2 billion for this upcoming 2021 fiscal year and Koyfin’s estimated enterprise value of $122.5 billion for the firm, this results in an EV-to-Sales ratio of 29 for Snapchat.

Meanwhile, the firm’s valuation is assigning an equity value of at least $418 to each of the platform’s daily users despite the fact that annual ARPUs are approximately $15 per user.

From multiple standpoints, Snapchat seems to be largely overvalued as the company would have to monetize its user base to a significant extent to justify its current price tag. Moreover, the firm continues to struggle to report positive bottom-line profitability despite its large size.

All things considered, the downside risk for this stock is quite large and any hints that its user base growth may be decelerating could result in a sizable double-digit correction on short notice.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is a freelance financial analyst with 7 years of experience in the industry. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing, macro analysis, and technical analysis. Other publications Alejandro has written for include The Modest Wallet, and Capital.com.