So many investors have been in the sell Snap Inc (NYSE:SNAP) camp — me included. Maybe CEO Evan Spiegel rubbed investors the wrong way, taking big vacations and only selling non-voting shares in the company’s IPO. Perhaps it was the incredible valuation Wall Street gave when Snap went public. How about the immense pressure from Facebook Inc (NASDAQ:FB) on a daily basis? I know those were all main reasons why I have avoided SNAP stock.
In a way, many feel that Snap deserves this pummeling.
For all the reasons that there are not to like SNAP stock at this point, a bullish situation could be setting up, though. Shares have cratered this month, falling 21% in July. There are several variables likely behind the fall.
First, most investors know about Snap’s lockup expiration. Insiders can begin selling 400 million shares on July 31st. For the record, SNAP stock only has a float of about 188 million shares. If insiders were to sell all 400 million shares that they hold, it would flood the market with supply. This would collapse the stock.
Making matters worse, another 782 million shares will be available for employees to sell on August 14th. If there was currently a ton of SNAP stock buyers, this additional supply would be welcomed. It would alleviate the stock shortage, as demand is too high. However, that’s far from the current case.
Adding pressure to all of this is Facebook. The company and its Instagram property continue to pummel Snapchat. On Wednesday, Facebook reported another excellent earnings result, putting even more pressure on Snapchat. Before the report, Richard Saintvilus said FB stock could head to $180 following its results, and he’s pretty darn close already.
But, why is SNAP stock trading higher, despite Facebook’s good results? That’s part of the bullish driver.
What’s Bullish for Snap?
The stock’s biggest issues are, obviously, Facebook and insider selling. That’s bad news, because it’s both fundamental and technical in nature. But, Snap management could do one huge thing that would end the pain immediately. Actually, it would probably jumpstart a 10% rally, if not more.
Management should say they’re not going to sell their stock after lockup expiration — not at these levels, anyway. Better yet, they should say that not only are they not selling, but they are buyers at these supposedly low levels. They’re not low enough for me, but perhaps if I ran the company I would feel they were undervalued.
If that were the case, management could send the stock skyrocketing. The timing of this event could be perfect, too. If the market prices in all of the negatives (Facebook, lock-up expiration, etc.), SNAP stock could finally capitulate. In other words, with its negative events set to take place, it could be near a bottom.
We may be seeing this in Thursday’s action, as shares were initially down in pre-market trading and are now up about 4%.
Moving Forward With SNAP Stock
Obviously, investors can’t buy on the hope that management comes out with force. I don’t want to touch SNAP stock because I don’t know if it’s near a bottom. For all we know, shares will head lower.
Additionally, I don’t have strong faith in the product. Management ruffled a lot of feathers, and at more than 30x trailing earnings, its valuation still isn’t right for me. Even at 15x sales, I would have a hard time getting excited about this one.
Facebook is the king of social media. If investors want social exposure, they might as well go with the best. Heck, its Instagram property has more daily active users on its Instagram Stories feature — which is a copy off of Snapchat’s Stories feature — than Snapchat has on its entire platform! If that’s not domination, I don’t know what is.
For those that do believe, however, there is a trade now that we got some perkiness on Thursday. SNAP stock hit a low of $13.14 on Thursday, which also stands as its 52-week low. If investors want to trade SNAP on the long side, they could do so with a stop-loss just below Thursday’s low.
That way, if the bottom is near or if management finds a way to squeeze the shorts, investors are in at a good price. If not and shorts continue to pile onto SNAP stock, longs have a well-defined risk-reward. A return back to its $17 IPO price would be good for a 22% rally from current levels.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
