Snap Stock: Next Stop, $17?

Shares of Snap Inc. (NYSE: SNAP) are picking up steam again. Snapchat’s parent company has seen its stock move nicely higher for four consecutive trading days, surging 17% in the process. Snap is also trading higher on Tuesday, so the winning streak may not be over just yet.

Snap stock has been on fire since noted worrywart Citron Research issued a rare buy recommendation last week. Citron — best known for skewering high-flying stocks with questionable business models — feels that the dot-com laggard is oversold at this point. Citron argues that the heavily shorted stock already has the negative catalysts and news flow priced into the shares, and has set a target price of $17 on the stock. That’s plenty of upside for a stock waffling about in the pre-teens at the time of the report.

Image source: Snap, Inc.

Snapping back is no easy feat

Citron Research is frank about the many things that have gone wrong at Snapchat. It pushed out a controversial redesign that angered many diehard users. It’s coming off of a rough quarter and a ridiculous conference call. However, Citron points out that some of the celebrities who have dissed Snapchat’s redo are still on the platform. The report also plays up Snapchat as the one social media giant that is a hit with advertisers without running afoul of data privacy issues.

The bullish report concludes that Snap is one stabilizing quarter away from a return to $17. The rub in that thesis is that the stock has been a dangerous one to own during earnings season. We’ve gone through five quarterly reports in Snap’s brief life as a publicly traded company, and the stock has delivered double-digit percentage slides in all but one of those five quarters.

Snapchat’s latest quarter was not the exception to the rule. The stock shed nearly a quarter of its value after falling short of analyst expectations. Clocking in with top-line growth of 54% may seem great, but it’s not a good look when analysts are targeting a 63% spike in revenue.

Citron’s dream of a stabilizing quarter may have to wait. Snap’s guidance for the current quarter is unimpressive, warning of a substantial deceleration in revenue growth. The bottom line will also take a hit as infrastructure costs inch higher to combat the damage from the controversial redesign.

The silver lining here is that Snapchat’s popularity continues to grow. It closed out the quarter with a record 191 million daily active users, and as it inches closer to profitability there’s a lot of upside to be had relative to the social media players that aren’t out of favor. A lot can go wrong on the way back to last year’s IPO price, but it’s hard to bet against a platform that’s still growing.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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