Snap stock sends bullish signals ahead of earnings: buy or sell?

Snap stock price rose by 6% on Monday, outperforming other popular companies as the management announced its progress in artificial intelligence (AI) and virtual reality.

It jumped to $5.15, up modestly from the year-to-date low of $3.78. This rally will be put to the test when the company publishes its results this week.

Snap is facing major headwinds

Evan Spiegel’s Snap is facing major challenges, which explains why its stock has plunged from a record high of $83 to $5 today.

In contrast, Meta Platforms, its biggest competitor, has become a trillion-dollar behemoth.

TikTok is also seeing an impressive growth rate as it has become the fastest-growing social media company in the world.

Snap’s main challenge is that the young Americans who helped to propel it in the early days have now moved on to other platforms.

The most recent results showed that its North American daily active users dropped to 94 million from over 100 million in the same period a year earlier. 

This slowdown is important because the North American segment brings in the most money.

The average revenue per user (ARPU) in the region is $10.8.

In contrast, the same figure in the faster-growing Rest of the World has jumped to $1.24. Its European business has an ARPU of $3.04.

Snap makes most of its revenue in North America, which may be affected by the falling user activity.

Its business made over $1.02 billion, up by 6% from the same period a year earlier. This growth rate was lower than its global figure of 10%.

The sad part is that it may not be possible for Snap to supercharge its North American business again.

For one, the young people it targets have largely moved on to TikTok and Instagram. Its AI and VR investments may also not pay off in the long term.

Snap to publish earnings this week

The upcoming earnings report will likely provide more colour about its business.

Wall Street analysts predict that Snap’s business made $1.53 billion in the first quarter, up by 11.8% YoY.

While impressive, this trajectory is much slower than it was in the past.

The average annual revenue estimate is expected to be $6.7 billion, up by 13% YoY. 

Most importantly, the company’s turnaround investments have led to higher costs and a lack of profitability. The estimate is that its loss per share will be 8 cents.

This explains why a top activist investor is urging the company to cut costs.

Snap stock is known for its volatility whenever it publishes its earnings.

For example, it dropped by 12% when it released its last numbers and jumped by 18% after the previous report.

Before that, it crashed from $9.56 to $7.15 after releasing its results.

Snap stock price technical analysis

Snap stock chart | Source: TradingView

The daily chart shows that the Snap share price has done well in the past few days.

It has soared from a low of $3.80 in March to $5.15 today. 

A closer look shows that it has formed a bullish engulfing pattern, which often leads to more gains.

It has also formed an inverted head-and-shoulders pattern.

Therefore, there is a likelihood that the stock will continue rising, possibly to the key resistance level at $6.90, its lowest level in September last year.

Such a move would imply a 34% jump from the current level.