While the stock market is having difficulties this year, Snap Inc (NYSE:SNAP) stock has fallen off a cliff and into an abyss. It is now but a mere fraction of its initial public offering (IPO) — falling as much as 77% off its highs.
Since the February stock market correction equity investors have struggled with headlines from U.S. tariff wars and rising bond yields. The bulls were able to shrug them off once and are int he process of doing it again here. But most recently, fears escalated with regards to how aggressive the U.S. Federal Reserve will raise rates through next year. So rallies have been difficult to hold and sustain.
Snap stock did find some exuberance but that was way back off the February earnings report. Since then it has been nothing but disappointment, leading to a sharp 65% correction.
The stock did find some support recently, but so far every bounce has been an opportunity to sell. So I consider today’s trade to go long snap a highly speculative bet inside a conservative portfolio. Earnings are coming soon, which adds to the coin flip element of this bet. I am not optimistic on the management team, but I do want to bet on the platform itself. Every teenager I see is on it every day and all day. This is a platform that is too valuable to just die. Someone will figure it out and it may not be the current owners.
I traded Twitter (NYSE:TWTR) when it was down to $14 on the same thesis. The Twitter platform was just too valuable for it to die. There is a place for SNAP and a way for it to make money but the current owners have not figured it out yet. Fundamentally speaking SNAP is not cheap. It sells at a three times book value and 11 time sales. Compare that to Twitter which sells at eight times sales and it is profitable. So even though Snap stock price has fallen off a cliff there’s still quite a bit of Hopium priced into it.
Yes, it can go lower and that’s the risk I’m willing to take at this point. So sizing is important when gambling on a risky stock. I usually don’t risk an amount that will break my piggy bank or my heart.
Technically speaking, Snap found support round $6.75 per share and has an opportunity around $7.50 per share. If the bulls can take it higher than that, they can retest $8 per share. more importantly, they would have taken a giant step towards a sustainable breakout. It’s losing the $7 level today and that would be a setback that may bring a gap fill below. But ultimately my bet here is binary.
Often if a company can break out of a sharp descending trend line of lower highs they can deliver a powerful rally with momentum. Wall Street is a “hold,” yet the stock is trading well below their average price targets. So if the analyst see any upside momentum they may be tempted to raise their ratings to a “buy.” So the headline risk is to the upside there.
The management element is perhaps the best opportunity trigger for SNAP bulls. I believe that any major change in the leadership would spur buying. I don’t think that Wall Street are fans of current CEO.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
