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Snapchat (NYSE:SNAP) stock fell 35% in 35 days but investors should not worry too much. Although it lost so much and fast, it’s still in good shape overall.
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If you look back a year, SNAP stock is up 35% and 280% in two. Clearly, we need perspective to clearly judge the stock here. Over time, if markets are higher, it will also do well. It is temporarily having difficulties stabilizing, so patience is key.
The social media concept is still alive and well and is not a fad. In fact, we are doing it more than ever and this trend is only going to accelerate. Facebook (NASDAQ:FB) just sealed the deal on that by announcing that it would take the next level in social media. Brace for impact, we have the metaverse coming.
SNAP Stock Opportunities Loom
I most certainly think that the rest will follow in one form or another. Therefore, bring out the popcorn it’s going to be a great show. Of late, Twitter (NYSE:TWTR) and SNAP stocks are in similar pickles. They both look like they offer reasonable entries.
But investors are slow to commit to buying them, and that’s the opportunity. The door is open for now and my pick of the two would be SNAP.
Users of the platform are loyal so the company has a solid base on which to build. It may appears to be expensive to the untrained eye, but their financials suggest otherwise. SNAP price-to-sales is 20 and in line with the likes of Tesla (NASDAQ:TSLA). Although it is not dirt cheap, the company grows fast enough to justify it.
In the last four years, management quadrupled its revenues. They could not deliver that kind of performance on the cheap. There’s just no simpler way of stating it. Therefore, valuation is not the current problem plaguing SNAP’s price action. Luckily, the 35% drop came from extremely high levels. The bounce out of the pandemic bottom was too ferocious. It rallied 1000% from the middle of March 2020 to September of this year.
It soared 50% to start this incredible rally from its October 2020 earnings report. In contrast, the most recent earnings event had the exact opposite reaction. When management reported earnings three weeks ago, the stock fell 30% and is still trying to found footing. Therein lies the opportunity, because this falling knife has value.
We already established the fundamental part of it, but the technicals also support that idea. When a stock falls into a prior contention zone like this one, it often finds footing. SNAP stock is approaching levels that the bulls have defended for almost a year. Odds are that they wage a good battle once more now.
Moreover, if they fail, there is a similar situation waiting just below that. In essence, I don’t think that the current environment warrants SNAP stock to be below $45 per share. While that is 13% below current price, it is still a reliable platform just in case. Furthermore, unless the stock market corrects the fans will snap it up — pun intended.
Leave Room for Short-Term Doubt
Source: Charts by TradingView
Investors must admit that there is always room for doubt. Especially that overnight we are learning about new lockdowns. That is a new wrinkle but one that could bring bids to social media platforms. If we are at home, we are on social media more often.
These are unique macroeconomic conditions, so there are no experts. This is enough reason for me to insist on leaving room for error in all trades. Investors would be smart to wait or take partial positions to start.
There is also a nagging risk from those who believe in filling all gaps on charts. That incredible earnings pop from last year left a massive one open. Those are physical holes in the stock chart that could become magnets. Not all gaps fill, but that one sure looks tempting. It could take a market wide correction or a Black Swan event for snap stock to go there.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
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