Snap Stock Under Pressure Despite Solid Quarter

Snap Inc. (SNAP) stock is trading higher by a few pennies ahead of Wednesday's opening bell after beating third quarter earnings per share (EPS) and revenue expectations by small margins. Revenue rose a healthy 49.9% year over year, but the social media giant failed to turn a profit, losing $0.04 per share. Daily Average Users (DAU), a popular industry metric, rose to 210 million during the quarter compared to 196 million in the third quarter of 2018.

The stock initially sold off more than 4% after Tuesday's post-market release, with mixed guidance persuading shareholders to hit the sell button, and then bounced back into the green. Even so, the muted reaction exposes conflict about Snap's outlook into 2020 and whether it can build on gains that have translated into a 150%-plus return so far in 2019. Early morning upgrades by Needham and JPMorgan have tilted the scales in favor of bulls, at least for now.

Needham's upgrade from "Underperform" to "Hold" noted that Snap's balance sheet could become breakeven or even profitable in 2020, well ahead of its expectations, following a successful $1.1 billion convertible offering and cost-cutting measures designed to expand margins. The analyst also expects these actions to add value in coming quarters by slowing the pace of senior management turnover.

SNAP Weekly Chart (2017 – 2019)

The company came public at $24.00 in a March 2017 offering and posted an all-time high at $29.44 in the following session. Aggressive sellers then took control, dumping the newly minted stock through the IPO opening print in a downtrend that initially found support in the low teens in August. A proportional bounce got sold in the first quarter of 2018, yielding a steady downtick that broke the prior low in May.

A bounce filled the breakdown gap into June and stalled, giving way to a persistent decline that continued into late December's all-time low at $4.82.  Buyers returned when tax selling season ended at the start of January, generating a healthy recovery wave that ran out of steam at the 2018 breakdown level in April. The subsequent pullback held short-term support, setting the stage for a secondary advance that reached a 16-month high in the upper teens in July. 

The reversal into the fourth quarter began at the .786 Fibonacci retracement level of the 2018 downtrend while the weekly and monthly stochastics oscillators crossed into sell cycles. Taken together, these technical elements signal an intermediate correction that could post even lower lows into year end. However, the weekly indicator has now reached the oversold zone for the first time in a year, raising the odds for a short-term bounce that tests harmonic resistance under $20. 

SNAP Daily Chart (2018 – 2019)

The on-balance volume (OBV) accumulation-distribution indicator posted a new high in February 2018 and entered a distribution phase that accelerated to a new low in the fourth quarter. Accumulation into July 2019 matched price action perfectly, also reversing at the .786 retracement. OBV fell to a three-month low this week when the stock bounced at support, exposing a bull-bear conflict that could come into play in the coming sessions.

Three pullbacks have been bought at the rising 200-day exponential moving average (EMA) so far in 2019, highlighting the importance of watching current price action near $13.50. The two-sided tape that set into motion after last night's release has continued into the opening bell, indicating that market players should look for a mixed session that tests the will of shareholders in an increasing adverse technical environment.

The Bottom Line

Snap posted an upbeat quarter, but mixed guidance triggered an initial sell-the-news reaction. While bulls have lifted the stock into the green for now, technical headwinds raise odds for increased selling pressure and an intermediate correction that could last for several more months.

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