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Is the Snap Inc (SNAP) Stock Rally Worth a Buy?

Snap Inc (NYSE:SNAP) stock is bouncing as it moves past its lock-up expiration. In each trading day last week, SNAP stock closed higher than its previous day.

Is the Snap Inc (SNAP) Stock Rally Worth a Buy?
Is the Snap Inc (SNAP) Stock Rally Worth a Buy?

Source: Snap

Lets repeat that with context this time. Much maligned SNAP had five green days in a row when the market was selling off due to political concerns.

That’s pretty strong momentum. Is a bounce coming?

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The bulls hope so, and they point to other social media IPOs as proof of this. Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR), which both sold off into their lock-up expiration, started rebounding after the expiration. LinkedIn Corp (NYSE:LNKD) bottomed out about a week later before starting its ascent higher.

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SNAP stock appears to be on a similar trajectory. I’ve pulled up this chart before because it’s actually quite eerie how comparable SNAP and FB stock are after their IPOs. If you track the current similar trajectories out, then now is the time to buy SNAP stock.


Click to Enlarge

But I’ll reiterate what I have said before. SNAP isn’t going to rebound like a rocket ship here because Facebook rebounded like a rocket ship after its lockup expiration. At some point, the fundamentals need to propel this stock higher.

And that is where SNAP bulls are in trouble.

Facebook’s Big July 2013 Quarter

If you look at the chart above, FB stock didn’t really get its mojo back until about 300 days into its life as a publicly traded company.

But then Facebook delivered what JPMorgan called a “thesis-changing” quarter in July 2013.

For a long time, Wall Street was pessimistic on FB stock because the company didn’t generate enough mobile revenue. The writing was on the wall. Consumers were going mobile. But Facebook wasn’t up-to-speed with that transition, and that spooked investors. Many thought Facebook was going to be left in the dust.

But the July 2013 quarter erased those concerns and really changed the whole narrative surrounding FB stock. The mobile growth story was born. Mobile ad revenue came in a whopping 50% above expectations, while mobile user growth surged more than 50% higher year-over-year.

It was an eye-opening turnaround. In just a year, mobile had gone from zero to 41% of Facebook’s ad revenue.

And FB stock soared 30%, its best one-day gain to-date. From that point on, FB stock never really looked back.

Will Snap Have A Blowout Quarter?

Snap needs that sort of thesis-changing quarter in order for it follow the Facebook trajectory.

But will that happen? Almost assuredly not now, and maybe never.

Facebook turned its business around by developing an entirely new growth trajectory based on mobile, and scaled that business with exceptional pace.

But what can Snap do that is similar to that? Snap needs to find a way to monetize its user base beyond selling ads, because Facebook is killing them at that. Facebook offers more reach among a similar, if not essentially identical, demographic.

Snap is pushing on the hardware front with Spectacles, but Spectacles revenue was only a hair above $5 million last quarter. It doesn’t seem like the sort of business that will scale quickly or get Wall Street excited.

Outside of that, Snap’s growth story isn’t really all that different from Facebook’s growth story. And that’s a big problem, because in this David versus Goliath match-up, Goliath keeps winning.

Bottom Line on SNAP Stock

SNAP stock is bouncing and showing good momentum, much like FB did after its lock-up expiration.

But TWTR also showed similar momentum after its lock-up expiration.

Investors shouldn’t get too excited about this recent momentum in SNAP stock. If Snapchat is to follow in the footsteps of FB stock, it needs a thesis-changing quarter to kick things off.

But I doubt SNAP will have such a thesis-changing quarter now or really ever. Competition is just too stiff.

As of this writing, Luke Lango was long FB. 

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