Snap Snapping Back Despite Analysts’ Beliefs

Snap

Social media app Snap debuted in early 2017 and until this year was a bust by any definition. 2019 has seen the stock snap back pretty nicely and it may not be done.

When people buy IPOs, the expectation is that it will bust out of the gate and just keep going. Some do, like for instance this year’s IPO star, Beyond Meat, which opened at $46 back on May 2 of this year and less than 3 months later broke $234. It has settled in since but it still fetches over $163 a share, and a return of over 360% in 4 months is still pretty amazing.

The stock market has moved up this much during the current bull market but that took a whole decade, and people are excited enough about that. To get this return in this short amount of time is way beyond what could ever be expected with a mature stock.

Along the way though, we kept hearing analysts telling us that the rise we had seen already exceeds their models and were saying that this can’t keep up, but it still went higher. Many, including these analysts presumably, don’t really understand that well how stocks work and fundamentally-derived limits or this affecting stock prices in any way depends solely on whether or not people pay attention to them, and often they do not.

When we tally these things up, it cashes out to some people having a mistaken belief about the future of a stock, and nothing more. The lesson that needs to be learned here is that people don’t just buy stocks for dividends, either present ones or future ones, they mostly buy them for capital gains. Beyond Meat is actually losing money but they sure have delivered some nice capital gains regardless of how many years they will need to pay out dividends to account for this massive rise.

A stock’s price is completely about what sort of demand is out there for it, and it doesn’t matter what is driving demand here as this isn’t even relevant. An expectation that a stock’s price will rise will in itself make this so as sure as the sun rises if the expectation is strong enough.

Whenever something goes up this much this fast, you get to a point where the urge to take profits overcomes the demand, and this is where the supply side takes over. We saw that with Beyond Meat when it peaked in late July and it gave back over $90 a share over the next three weeks, but things have settled in since and we’ve added over $20 now.

With the ground tilted a little downhill now instead of the uphill march that this stock took earlier in the year, the frenzy has subsided, and we’re back to what resembles a more normal chart distribution. This does not necessarily mean that the fun is over for the year though with Beyond Meat and if they can get back above $170, there’s a lot of room between there and its previous high of $234.90.

Few IPOs perform anywhere near this well, and people remember the big hits a lot more than the misses. IPOs generally lose on average for the first couple of years, including some that have later gone on to real fame.

Sometimes an IPO Can Be Exciting but Not in a Good Way

Snap wasn’t just an IPO that didn’t really cut it, it was one of the more terrible ones of the last few years. It dropped 45% from its initial trading price of $24 a share over its first 6 months of life, and in December 2018, almost 2 years later, its price had fallen below $5 and it was down almost 80% at that point.

This was not what people had hoped for when they bought the IPO, and to look at this stock back then, its chart sure looked ugly. Things started to change though, and it’s now up 316% since then, and is also up 187% year to date.

True to its name, the stock simply snapped, but over the last 9 months, it has snapped back. It’s not that we have recaptured all the losses yet, but it’s over $15 these days which isn’t anywhere near as good as $24 but it sure is a lot better than $5.

It’s not that Snap is actually making a profit now or anything, but they are at least doing better now. Their last quarterly earnings report did beat the street’s estimates of a loss of 10 cents a share by only losing 8 cents a share. Revenue increased by 48% year over year. While the company reported year over year losses of $79 million, this was 53% better than the previous year.

When a stock has been decimated to the extent that Snap’s has, and then you see improvements in business performance like this, seeing the stock rebound and rebound quite a bit should not be surprising.

There is also usually a story behind stocks dropping this much of their value, and in this case, it was an upgrade to their app that was not popular at all among their users. Social media is a line of business that is pretty fickle with plenty of strong competition, so when this happens, you are in real trouble.

This has been resolved though with further upgrades, and their revenue is headed in the right direction again. Their improved numbers may have not put much of a smile on the faces of skeptical analysts, but if you have owned this stock in 2019, there’s a big one on yours.

Snap’s userbase has now grown to 500 million, now ahead of Twitter in the social media app world and second only to Facebook’s 2.4 billion. Facebook simply dominates this market and no one even dreams of catching them, so being in second here is a genuine achievement.

It is All About What the People Think, and the People Get to Decide

It wouldn’t be unreasonable at all to be troubled by the fact that they have this many users and are still losing money, but where their stock is concerned, it is all about how much market love that they get from all this. So far, all of this has taken us from the market despising this stock to riding them up 10 times more than the average stock has this year. That’s love in great abundance.

Measuring this effect is not about crunching the numbers, it is about taking the temperature of the mood of the market and assessing what may be behind changes in mood and looking to ride that wave. Once you’re riding it, you don’t want to just guess at how far it will go based upon what your beliefs may be, regardless of where the beliefs came from, you just want to keep believing as long as the crowd does.

If not, you will end up guessing wrong a lot of the time, not getting in when the market tells you that they have changed their mind and you should, or jumping off while the party is still going on. You might think that you were right in your analysis and the market is wrong, but markets are never wrong because whatever they do is the truth and everything else is just conjecture.

The analyst community is still not all that convinced though, even after all this, and only 9 of the 35 analysts that follow it currently have it as a buy. The threshold for these people for a buy is actually pretty low compared to what we would actually want to buy ourselves, and many of their buys underperform the market and there really wasn’t any reason to think otherwise at the time either.

This compares to 35 of the 46 analysts having a buy rating or equivalent with Facebook, and the fact that Snap is killing Facebook and just about everything else out there this year doesn’t seem to matter much. Whatever is being used to arrive at this just isn’t matching up with reality all that well, although that’s not any sort of prerequisite.

As Snap has risen, the analysts have had to keep revising their price forecasts for it as it kept breaking through them. It’s not that this should matter though because we never want to make a decision now based upon what anyone thinks will happen in the future, but some still do and they get dragged into the mud here as well.

At the start of the year, the consensus target for Snap was just $8. By early February that got busted, and these targets gradually moved up with its price, set a little higher, but never really spoke to where the stock was actually headed.

Nowadays, the average target is $17, once again just a little over its current price. If these targets were supposed to cover a couple of weeks, they would actually be reasonable, but this is not their intention. Anyone watching this show should come away with a very good idea of just how unreliable this all can be.

While analysts may still have some serious reservations about the company, and in some cases these reservations may be valid, it’s only when the market shares them to this degree that any of this starts to matter.

If we looked upon this stock at the start of the year and thought about how long they may take to turn a profit and all the challenges that they face to get there, that would surely be enough to turn our heads away, but ours is just one head among many and we need to see where the heads are pointed generally.

We can’t really say how long this rebound will last, but there is never really a need to say such things and we’d be pretty pretentious to think that we could see the future this well. We still need to assess a stock’s outlook but throwing out numbers like this is neither reliable nor of any real practical value.

Those who got off once Snap hit $8 a share or at any point where it exceeded its target price this year are kicking themselves now. Kicking themselves is actually very appropriate though as they are indeed the harm that was done was completely by their own hand, as we are always the ultimate judge of such things.

Snap has already broken $17 now though and while it has pulled back a bit since then, the overall trend remains upward. As long as this is the case, there is no reason not to be in this stock. If we are seeking soothsayers, which is not even a good idea with stocks, we need to look for real ones and not just those who have nothing but a string of bad guesses to boast about this year.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.