Snap Inc. (SNAP) is trading lower by more than 9% in Friday's pre-market session despite beating fourth quarter 2020 top- and bottom-line estimates, reporting a profit of $0.09 per share while revenue surged 62.5% year over year to $911.32 million. However, shareholders hit the exits after the company warned that first quarter 2021 EBITDA would post a loss between $50 million and $70 million despite raising revenue guidance by about 5%.

Key Takeaways

  • Snap beat fourth quarter top- and bottom-line estimates but warned about first quarter 2021 earnings.
  • The stock has fallen nearly 10% in Friday's pre-market.
  • A strong technical pattern should limit selling pressure to the low $50s.

Global daily average users (DAUs) rose 6% to 265 million, 7 million better than estimates, while average revenue per user of $3.44 also beat expectations. The company cut its net loss to $113 million, better than the $241 million lost in the same quarter last year. First quarter guidance came as a shocker after those upbeat numbers, with Chief Business Officer Jeremi Gorman warning that Apple Inc. (AAPL) iOS 14 privacy changes, scheduled for implementation this quarter, could affect the Snap's ability in targeting user ads.

Snap analysts had expected the social media app to post a $19 million profit in the first quarter, but events have not been cooperating. The company lost two weeks of advertising income after the Jan. 6 insurrection, while rival TikTok is still operating in the United States, despite efforts by the Trump administration to ban the application or sell it to American investors. Appeals to overturn court decisions favorable to the Chinese company are still pending.

Wall Street consensus stands yields a "Moderate Buy" rating on Snap stock based upon 18 "Buy" and 4 "Hold" recommendations. Two analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $29 to a Street-high $70, while the stock is set to open Friday's session about $3 below the median $58 target. The first quarter profit warning has the potential to generate downgrades and lower targets.

Tip

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it strips out the cost of capital investments like property, plant, and equipment.

Snap Daily Chart (2019 – 2021)

Chart showing the share price performance of Snap Inc. (SNAP)

TradingView.com

The company came public at $24.00 in March 2017 and rolled into a downtrend that posted an all-time low at $4.82 in December 2018. Buying interest resumed in 2019, yielding a slow-motion recovery wave that stalled in the upper teens in July. The stock broke out above that barrier in January 2020, but the rally failed, giving way to a vertical decline that posted a higher low in the single digits in March.

A strong bounce into the second quarter completed a round trip into the first quarter peak in May, generating an immediate breakout that stalled just below the 2017 high in July. It broke out in October after a strong quarterly report and eased into a rising channel in December, adding points at a modest pace into Wednesday's all-time high at $60.52, ahead of a post-news decline that has now settled on the 20-day simple moving average (SMA). 

Channel support is narrowly aligning with the 50-day exponential moving average (EMA) just above $50, marking a price level that bulls need to hold to retain control of the ticker tape. The stochastic oscillator is cooperating with that effort, grinding through weekly and monthly buy cycles. The on-balance volume (OBV) accumulation-distribution indicator is also lending a hand, posting another all-time high earlier this week.

Tip

An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, and then builds a trend indicator that fluctuates within these bounds. Traders use the trend indicator to discover short-term overbought or oversold conditions. When the value of the oscillator approaches the upper extreme value, technical analysts interpret that information to mean that the asset is overbought, and as it approaches the lower extreme, technicians consider the asset to be oversold.

The Bottom Line

Snap is trading sharply lower on Friday after warning that it will lose money in the first quarter, despite strong revenue growth.

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