Snap Inc (NYSE:SNAP) was supposed to be the next coming of Facebook Inc (NASDAQ:FB) when it went public earlier this year. The company’s Snapchat social media app was (and remains) wildly popular among the younger generations, and it sported new features not yet available from Facebook or Twitter Inc (NYSE:TWTR). But SNAP stock has a massive problem — one that Wall Street, despite all the hype, found it was unable to ignore.
That problem isn’t Snap’s lack of users, or its popularity with its core user base. On this front, Snap is proving a real challenger to Facebook. According to a research note earlier this year from Piper Jaffray, Snapchat is the “choice of the next generation,” with 39% of teens responding that Snapchat was their favorite social media network to follow.
Unfortunately for Snap, that user base offers very little in terms of cash flow.
Unlike Facebook’s core demographic — Generation X and Baby Boomers — Snap’s teen user base is cash strapped, and it shows in the company’s quarterly earnings reports. The company was hit hard following its first trip to the earnings confessional, as losses mounted and daily average user growth failed to live up to expectations.
Snap Earnings on Deck
Snap is set to make its second appearance on the earnings stage since its IPO after the close tomorrow. Wall Street is expecting a loss of 14 cents per share on revenue of $186.8 million. Small potatoes for a company battling the likes of Facebook, but some analysts are hopeful that losses with be a touch narrower, as EarningsWhispers.com reports a whisper number of -12 cents per share.
Given the level of bearish sentiment levied against SNAP stock, hitting this whisper could provide at least a short-term bump.
Speaking of sentiment, Zacks data indicates that only nine of the 26 analysts following Snap rate the shares a “buy.” Meanwhile, Snapchat’s parent is the most shorted tech stock that has gone public this year, with more than 28% of the stock’s float sold short, accounting for a bet of about $1 billion that the stock will decline.
But short sellers aren’t taking any chances. During the past week, the Aug 11 put/call open interest ratio has plunged to a reading of 0.41, with calls being added at a faster pace than puts among options most affected by tomorrow’s quarterly report.
If options traders are correct, SNAP stock could be in for a rather sizable move. In fact, Aug 11 implieds are pricing in a potential post-earnings move of more than 15%. This places the upper bound at $15, while the lower bound resides at $11.
Let’s look at the trades.
2 Trades for SNAP Stock
Call Spread: An earnings rally isn’t a long shot. The company must at least report in-line earnings and revenue results, which wouldn’t be too big of a shock, while daily average users need to grow at least slightly more than expected. Both these goals are easily achievable, especially with expectations taking a nosedive after Snap’s last quarterly report.
Given this low bar, any positive news could be an excuse for SNAP stock to rally.
Traders looking to take a risk on a SNAP recovery might want to consider an Aug $13.50/$14 bull call spread — which lies well within the expected move. At last check, this spread was offered at 14 cents, or $14 per pair of contracts. Breakeven lies at $13.64, while a maximum profit of 36 cents, or $36 per pair of contracts, is possible if SNAP stock closes at or above $14 when August options expire.
Put Spread: If Facebook’s recent efforts to clone Snapchat features has had any success, however, the situation could worsen significantly for SNAP stock. A wider than expected loss of declining daily average users could be devastating.
Traders looking to bet against Snap following earnings should consider an Aug $11.50/$12 bear put spread. At last check, this spread was offered at 15 cents, or $15 per pair of contracts. Breakeven lies at $11.85, while a maximum profit of 35 cents, or $35 per pair of contracts, is possible if SNAP stock closes at or below $11.50 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
