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Snap Stock: An End in Sight to the Recent Decline?

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Snap’s (SNAP) recent decline may be coming to an end. The stock has fallen by approximately 20% since mid-September despite the absence of company-specific negative news. Instead, Snap stock has been swayed by market-wide events.

Having said that, the further decline in the stock is highly limited. I think the stock may be heading for a resurgence in the coming weeks. Recently, some bullish option bets suggest that Snap stock will soon head higher, rising at least 17% in the coming weeks and months.

In Tuesday’s trading session, Snap closed at $14.15, falling 2.21% from the previous session. This change lagged behind the S&P 500’s 1.56% decrease for the day. Moreover, the Dow Jones lost 1.19% while the Nasdaq plunged 1.67%.

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Snap stock: Q2 recap and valuation

Snap, the company behind Snapchat, reported its Q2 earnings on July 23. In Q2, the company beat analyst’s revenue estimates by 29.66 million and EPS estimates by $0.03. Also, Snap’s daily active users (or DAUs) increased to 203 million in Q2 2019, compared to 188 million in a year prior. This increase was driven by the popularity of the company’s new augmented reality lenses and overall application improvements. At the same time, average revenue per user increased to $1.91, compared to $1.40 for the same period a year prior. Moreover, gross margins increased from 29% to 46%.

However, the stock’s PS ratio of 13.52x looks expensive compared to the industry and peers. The online media industry has a median PS ratio of 1.47x, based on data compiled from GuruFocus. Moreover, Twitter and Facebook have PS multiples of 9.19x and 8.14x, respectively. But in my view, for a company with revenues are growing at a GAGR of 105.85% over the past three years, a 10x or even 15x PS multiple can be justifiable.

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For Q3, Snap expects revenues in the $410 million–$435 million range, which is up roughly $100 million from a year ago. The company is slated to report third-quarter earnings on October 22 after the market closes. Analysts expect third-quarter EPS of -$0.05 and revenue of $435.33 million. This forecast implies rises of 61% and 46% year-over-year, respectively.

Institutional ownership and institutional transactions

Institutional ownership in Snap is approximately 26.88% of diluted shares. Most of these shares are in the hands of The Vanguard Group, which owns around 58.6 million shares or 5.32%. Next are Slate Path Capital LP, BlackRock Fund Advisors, and Capital Research & Management Company at about 1.71%, 1.57%, and 1.54%, respectively. The rest of the owners hold relatively small stakes. According to CNN Business, approximately 284,000 shares were bought by institutions, and only 74,000 shares sold during the past three months.

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Snap options analysis

The implied volatility for the options, at a $37.50 strike price that expires on October 25, stands at 98.77%. This number means that investors are expecting an event that could cause significant movement in one direction or the other.

Looking at the October 25 options, I see a bid/ask for the $14.50 call option of $1.01/$1.02. Also, I see a bid/ask for the $14.50 put option of $1.34/$1.35. Keep in mind that the options strike closest to the previous SNAP closing price of $14.15. We can calculate the expected price move using the mid-prices of these options:

1.345 (14.50 Put) + 1.015 (14.50 Call) = 2.36/14.15 = 16.7%

As you can see, the options imply that Snap stock could rise or fall by ~17% by the October expirations from the $14.50 strike price using the long straddle strategy. This assessment would place the stock in a trading range of $11.75 to $16.55 by the expiration date.

Moreover, the open interest levels for the November $17.00 calls doubled on October 8. According to barchart.com, the open contracts rose by 3,146 contracts to about 5,850. A buyer of the calls would need the stock rise to $17.45 by the expiration date, a gain of about 23% from Snap stock’s current price.

Also, the options, which expire in January 2020, saw increased call buying on Tuesday. The open interest for the $20.00 calls rose by 6,734 contracts to a total of 87,746 open contracts (source: barchart.com). A buyer of those calls would need the stock rise to $20.41 by the expiration date, a gain of about 44% from Snap stock’s current price

Analysts’ coverage and target price

A lot of Wall Street analysts have upgraded Snap, the Snapchat company, over the last six months. The consensus price target was $16.54, which represents a 17% upside. See MarketBeat for a detailed breakdown. According to TipRanks, SNAP is a “Moderate Buy” with an average price target of $18.01, representing 27.28% upside.

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