TikTok's run-in with the U.S. government has underpinned Snap Inc. (SNAP) buying interest since August, lifting the stock above the 2017 initial public offering (IPO) opening print at $24.00 and into a long-awaited test at the all-time high at $29.44 posted just one day later. Next week's third quarter 2020 earnings report could provide the catalyst needed for a historic breakout, even though the popular social media portal isn't expected to report a profit.

Key Takeaways

  • Snap stock is trading just below 2017's all-time high near $30.
  • The stock could break out ahead of next week's earnings report.
  • Current guidance expects the company to report another quarterly loss.

Bank of America Securities analyst Justin Post delivered an upbeat Snap assessment in September, advising that new initiatives including personalized public profiles and user-accessible advanced analytics could act as "potential engagement drivers," increasing revenue. Even so, the TikTok drama remains the most important price driver because an outright ban would underpin account growth for Snap.

Wall Street is highly bullish on Snap's long-term outlook, which makes sense given 60%-plus upside since the first trading day of 2020. Analyst consensus now stands at a "Strong Buy" based upon 22 "Buy," 6 "Hold," and just 1 "Sell" recommendation. Price targets currently range from a low of $18 to a Street-high $35, while the stock is set to open Wednesday's session about $1 below the median $28 target.

Monthly active users (MAU) is a key performance indicator (KPI) used by social networking and other companies to count the number of unique users who have visited a site within the past month. Websites generally recognize monthly active users via an identification number, email address, or username.

Snap Daily Chart (2017 – 2020)

Daily chart showing the share price performance of Snap Inc. (SNAP)
TradingView.com

Snap came public at $24.00 on March 2, 2017, and spiked to an all-time high near $30 in the following session. Aggressive sellers then took control, dropping the stock through the IPO opening print and into a downtrend that initially found support at $11.77 during the summer. A bounce into February 2018 carved a lower high, ahead of an August breakdown that posted an all-time low at $4.82 in December.

The bounce into 2019 stalled in the upper teens in July, while September and January 2020 breakout attempts failed. The stock fell more than 60% during the pandemic selloff and recouped those losses at a rapid pace, breaking out in June and piercing the IPO opening print a few weeks later. The buying impulse stalled in July about three points under the 2017 peak, yielding a rounded pullback, followed by a 100% retracement.

A rounding bottom is a chart pattern used in technical analysis and is identified by a series of price movements that graphically form the shape of a "U." Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements.

Snap Short-Term Outlook

The stock has been consolidating for the past week and could reach the 2017 high in a pre-earnings speculative bid. It's also possible that an analyst or two will raise price targets heading into the release, also underpinning buying interest. Notably, the on-balance volume (OBV) accumulation-distribution indicator has already lifted to a new high, adding a tailwind that favors a breakout into the $30s.

The prospect of another quarterly loss remains the wild card in this equation because the company will need to report aggressive third quarter user growth to justify higher prices. Theoretically, that should be a no-brainer, given 2020's surge in social media engagement as a result of the pandemic. In addition, TikTok users worried about a permanent ban may have opened Snap accounts during the quarter, just in case.

The Bottom Line

Snap could test 2017's all-time high in coming sessions, with a breakout opening the door to much higher prices.

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