Snapchat parent company Snap is the IBD Stock of the Day. Coming off a strong first-quarter earnings report, Snap stock has formed a deep cup-with-handle base, with Tuesday's action breaking a short downtrend.
Snap's Snapchat social messaging app boast more than 422 million daily active users, as of March. It makes its money through digital advertising sold on the platform. But Snap has had a rocky run in its time as a public company. Shares peaked near 83 in late 2021, before a major slump. Snap entered trading Wednesday more than 80% below its peak.
But Snap stock has gained 53% over the past 12 months, outpacing a 26% gain for the S&P 500. And the company is coming off a strong first quarter performance that helped its shares soar nearly 30% in one day.
On the stock market today, Snap stock rose a fraction to close at 16.77.
Snap Q1: 'Massive' Revenue Reacceleration
For much of the past two years, Snap has struggled to grow digital advertising sales amid an industrywide slump. That remained the case late into 2023, even as Snap's much larger rival Meta Platforms saw its sales surge more than 20% in consecutive quarters.
Some analysts questioned whether smaller social media platforms could still compete against Meta's empire of Facebook and Instagram. But Snap's March quarter results, reported on April 25, seem to ease at least some concern.
Revenue increased 21% year over year to $1.2 billion for Q1. That compared to 5% sales growth in Q4 2023.
In a letter to shareholders with the report, Snap executives said revenue growth is "improving faster than we had previously anticipated." The company credited improvements to its advertising platform and increased demand for its direct-response advertising.
Snap also posted adjusted earnings of 3 cents per share on the quarter, whereas analyst were expecting an adjusted loss of 5 cents per share, according to FactSet.
"We believe the massive reacceleration in revenue growth and above-consensus Q2 rev guide should help fuel the bull case for the stock," wrote Jefferies analyst James Heaney in a client note following the report.
Snap stock jumped 27% the next day. The company built on those gains to hit a recent high point of 17.29 in early May. Shares pulled back later in the month before regaining momentum in June, helping form its new base.
Snap Stock: Regulation Watch
Still, analysts remain iffy on Snap stock overall. Just 10 out of the 40 analysts following the stock hold buy calls, compared to 26 neutral views and four sell-equivalent ratings, according to FactSet.
Analysts may be waiting to see whether Snap can build on its revenue growth from Q1.
There are also regulatory questions facing Snap. The U.S. Surgeon General on June 17 said Congress should require tobacco-like warning labels about social media's effect on the mental health of teen users. And Snap is among the most popular social media platforms for Gen Z users.
On Tuesday, Snap announced several new safety features for Snapchat. They include updates to help users block accounts and safeguards making it more difficult for strangers to contact users.
Snap Stock: Near Buy Zone
With a strong 6% gain Tuesday, Snap's shares are approaching a 17.29 buy point from its cup-with-handle base, according to IBD MarketSurge.
The IBD Stock Checkup tool shows Snap stock with a Relative Strength Rating of 96 out of a best-possible 99. That indicates the stock outperformed most of the market over the past 12 months.
Snap stock also holds an IBD Composite Rating of 94 out of 99, according to IBD Stock Checkup. The score means SNAP stock currently tops nearly all other stocks in terms of key performance metrics and technical strength.
