Snap may have hit 'an inflection point'

Reuters/Brendan McDermid

Traders celebrate after the closing bell on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 6, 2018.

• RBC Capital Markets analyst Mark Mahaney has a theory for why Snap shares surged almost 50% on Tuesday.
• When sentiment on a stock is negative and the company shows that it's an an "inflection point," the stock skyrockets, he told Business Insider.
• Snap's app redesign and new-and-improved advertising technology could drive sustainable growth.

Snap shares ballooned to above $20 apiece Wednesday after it reported blockbuster fourth-quarter results. That's an almost 50% increase.

The dramatic increase partly resulted from a short squeeze, when short sellers betting against the stock wanted to cover their positions by buying back shares. Short sellers lost $375 million Wednesday because of Snap's huge gains, according to a note from S3 Partners.

But Mark Mahaney of RBC Capital Markets isn't surprised.

"This is what happens to a stock when sentiment is overwhelmingly negative, expectations are super low, and the company shows what seems to be an inflection point," he told Business Insider.

For most of January and leading up to the earnings results, Snap's stock sat at around $13 apiece. After earnings results, shares spiked to just above $18 in after hours trading, and continued on up Wednesday.

Snap reported fourth-quarter earnings on Tuesday, which showed revenue of $285.7 million, which beat Wall Street expectations. The results also showed earnings per share of -$.13, beating expectations of -$.16. Advertising revenue grew by 38% from the third quarter.

"The results from yesterday are sustainable," he said. RBC raised its price target from $15 to $21.

Mahaney said in a note that the "early testing of the new app redesign is causing gains in engagement and ad performance," adding that in one of Snap's first test runs, "the company saw the number of Daily Active users watching Publisher Stories on Discover grow by over 40 percent when compared to the old design of the application."

The company's growth was driven by a surge in automated, or programmatic, advertising. Snap's transition to an advertising auction platform is almost over, "and the number of advertisers is doubling Y/Y- so ad pricing has a lot of upside ahead" Mahaney said in the note.

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