scorecardSnap was 'oversold' after its disastrous earnings - now it's up 16% in 4 days
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Snap was 'oversold' after its disastrous earnings - now it's up 16% in 4 days

Snap was 'oversold' after its disastrous earnings - now it's up 16% in 4 days
Tech3 min read

Evan Spiegel

Greg Sandoval/Business Insider

  • Snap shares have spiked 16% over the last four trading sessions.
  • Shares tanked during the month of May as short interest rose, providing the perfect "backdrop" for positive momentum on any bullish sentiment, USAA Senior Equity Analyst Jason Lincoln told Business Insider.
  • M&A speculation isn't hurting the stock either.
  • Watch Snap trade in real time here.

Snap, one of the most bewildered tech stocks, has rallied sharply over the past few days, amid speculation it's a potential takeover target.

The recent bounce has been welcome news for Snap shareholders who have come under a barrage of pressure from short sellers. Short interest has risen considerably since Snap went public in March of 2017, and the company is one of the most shorted companies in the entire US application software sector. As of Friday short interest sat at $1.35 billion, or 21.3% of the float, according to data from financial analytics firm S3 Partners.

And it was those short sellers who were laughing all the way to the bank in mid-May when Snap plunged to a record low of $10.51 a share in the wake of its disastrous first-quarter results.

At the time, the company reported revenue of $230.7 million, missing the Wall Street estimate of $244.93 million by a wide margin. Snap attributed the decline in revenue to seasonality and the app redesign.

To make matters worse, the company said it ts growth trajectory will slow in the second quarter.

"We are planning for our Q2 growth rate to decelerate substantially from Q1 levels," Snap CFO Drew Vollero said, "with growth in auction impressions, partially offset by pricing for both Snap Ads and Creative Tools."

And while Snap shares were pressured in the weeks following the results, things seem to be looking up for them as of late.

Last week, short-seller Andrew Left, founder of Citron Research, published a note on Thursday saying Snap is "one stabilizing quarter from giving investors a 30% or more return -- more than you can see in any FANG stock in our opinion."

He also suggested Snap is a takeover target.

"Although we now find out that SNAP has plans for profitability in the neat 12 months, we still question if it will remain independent for that long," he said. "Google could easily give Snap the "grownup" it needs while also saving close to $100 million."

Left was indeed a major catalyst behind Snap's recent stock momentum, according to USAA Senior Equity Analyst Jason Lincoln.

"If you look at SNAP post earnings, the stock was oversold from a technical level - and pretty much had been all of May--with the short interest being fairly high," he told Business Insider. "So against that back drop, a respected firm published some research on May 31 that said that they thought it was dangerous to short SNAP and they saw fundamental value for the company higher."

Perhaps Lincoln best sums up why Snap shares are roaring in the past several days. "A beat up stock with elevated short interest gets positive commentary from respected firm = stock moving off of lows," he said.

Snap is down 18.2% on the year.

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