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%.
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.
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.
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.