Snap (SNAP) Could Rally Into the Mid-$50s

Snap Inc. (SNAP) stock is trading at an all-time high on Wednesday after the company beat third quarter 2020 top- and bottom-line estimates by wide margins. The company posted a profit of $0.01 per share, $0.06 better than expectations, while revenue rose an incredible 52.1% year over year to $678.67 million, beating consensus by more than $120 million. Daily Average User (DAU) growth posted impressive results as well, increasing 18% year over year.

At least 15 analysts lifted price targets after the release, with the new Street high at $50 highlighting a major sentiment shift that should translate into much higher prices. The majority of enthusiastic commentary pointed to e-commerce strength and big media advertisers as primary reasons for the high-percentage revenue growth, with the coveted younger demographic offering unique benefits, especially during the pandemic.

Snap added personalized public profiles and user-accessible advanced analytics in September that should continue to act as positive catalysts. In addition, the messaging company is benefiting from the ongoing TikTok drama, with many subscribers to that app opening new Snap accounts to "kick the tires," just in case acquisition negotiations fail and the U.S. government bans the Chinese company for security reasons.

Snap Daily Chart (2017 – 2020)

The company came public at $24 in March 2017 and took off in a two-day advance that stalled near $30. The stock then turned tail, slicing through the opening print of the initial public offering (IPO) and into a two-legged decline that initially found support in the upper teens. It broke that low in June, descending to $11.28 in August, with that level providing a trading floor into a May 2018 breakdown.

The downtrend posted an all-time low in the single digits at year end, giving way to a recovery wave that stalled in the upper teens in the third quarter of 2019. It broke out above that level in January 2020, but the rally failed, yielding a steep decline that filled the February 2019 gap near $8 before a vertical turnaround completed a round trip into the prior high. The stock broke out immediately, stalling within a few points of the 2017 high in June.

Snap Short-Term Outlook

A pullback into August found support at the 50-day exponential moving average (EMA) in the low $20s, giving way to a steady uptick toward $30 ahead of earnings, followed by a huge breakout gap on Wednesday morning. The placement of the gap is nearly perfect for additional identification as a "continuation gap" that often identifies the midpoint of an Elliott five-wave rally set. As a result, this advance could easily stretch into an upside target in the mid-$50s.

More importantly, high-volume breakout and continuation gaps rarely get filled immediately, lowering the odds for a deep pullback, while an aggressive momentum strategy may be needed to get on board at an advantageous price. A 20-day Bollinger Band® can be a useful tool in this regard, standing aside until a short-term downturn or consolidation pattern reaches within striking distance of the center band.

The Bottom Line

Snap stock has broken out above the 2017 high after a blowout quarter and could rally into the $50s in coming months.

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