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The Fourth Time's the Charm for Snap Stock

By Rick Munarriz - Updated Feb 8, 2018 at 2:45PM

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Snapchat's parent finally moves higher -- and sharply higher at that -- after its first well-received quarterly report as a public company.

If at first you don't succeed, try, try, and then finally try again. Snap Inc. (SNAP -5.65%) saw its shares soar 48% on Wednesday after posting better than expected financial results the day before. This is the first time the stock moved higher on earnings since Snap's IPO 11 months ago. The shares plunged 21%, 14%, and 15% in its first three quarters, respectively.

Snap stock responded so well that it's no longer a broken IPO. Wednesday's rally took it comfortably above its $17 debutante price, taking Snapchat's parent company to levels last seen in early June of last year. Several analysts responded with bullish moves following the upbeat fourth-quarter earnings announcement.

Snapchat's app on a smartphone.

Image source: Snap, Inc.

Snap to it

Revenue soared 72% to $285.7 million, accelerating from the third quarter's 62% growth rate. The surprisingly robust showing ends a streak of decelerating year-over-year growth at five quarters. Analysts were only holding out for a 53% top-line gain, making this a perfect contrast to last time out, when Wall Street pros were targeting revenue improvement of 87%. 

Snap is still losing money. However, its deficit narrowed to $0.13 a share, less red ink that the market was expecting. 

The head-turning nugget in the report is the improving usage trend. Snap's audience expanded by 8.9 million daily active users to hit 187 million, its largest net adds since the fall of 2016. The 5% sequential increase and 18% year-over-year jump in daily active users should silence critics figuring that it was all going to be downhill for the social clip-sharing platform. 

Analysts at JPMorgan, RBC Capital, Summit Insights, BofA Merrill, Evercore ISI, and SunTrust upgraded the stock following the report, with several other companies jacking up their price targets. The love wasn't universal, though. Susquehanna downgraded the stock following the report, but you don't soar nearly 50% higher in a single day without rattling a boo bird concerned about valuation or the sustainability of an uptick in the growth rate. 

Snap's in a good place right now, but it's understandable if some fence-straddling investors will want to see if this performance was a fluke. Snap had done nothing but burn investors the day after earnings through its first three outings as a public company. 

I singled out three things that could go wrong for Snap ahead of the report earlier this week:

  1. The stock was 0-for-3, falling at least 14% in each of the three previous quarters.
  2. Revenue growth was expected to continue decelerating.
  3. Daily active user growth was also decelerating.

Snap passed all three tests with flying colors. It still needs to improve its monetization to the point where it can turn the corner of profitability, but you won't hear too many shareholders complaining right now. The next big test is now another three months away.  

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