(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Snap Inc. (SNAP) shares have tumbled by nearly 37% since their high-profile IPO in March 2017 at $17, and they have fallen by over 60% from their all-time high of almost $29.50 in the days immediately following that debut. Now, the stock sits at the opposite end of the spectrum, with shares reaching an all-time low of $10.50 on Thursday. Even worse, options traders are betting the stock falls even further by the middle of October, by potentially another 16%, to a new record low.
The latest blowup at Snap came when it reported first-quarter results on May 1 that beat on both the top and bottom lines, but it warned of a substantial deceleration in growth for the second quarter, and higher costs. Adding more fuel to the fire, the all-important number of daily active users fell short of estimates.
The options set to expire Oct. 19 are suggesting that Snap's decline is far from over, with the potential for another $2 billion to be wiped off the company's market cap of nearly $13.6 billion. The $10 puts have an open interest of almost 26,000 contracts, and with a price of about $1 per contract, the stock would need to fall to about $9 for the options to break even, a decline of about 16.7% from the current stock price of $10.80.
The open interest at that strike price has been steadily rising since the company reported results on May 1. Prior to the quarterly results, there were no open put contracts at the strike price. The number of open puts more than doubled on May 18, rising from 10,200 open puts on May 17, to the current 26,000.
Profitability Not Even Close
Analysts have cut their revenue outlook for the company by about 10% over the past 30 days, and now see revenue climbing by nearly 44% to $1.189 billion. Meanwhile, the company is expected to lose about $0.60 per share in 2018. Forecasts are calling for steady growth over the next two years with revenue expected to grow by about 42% to 44% in both 2019 and 2020. Based on those estimates, revenue is expected to more than double by 2020 to $2.45 billion from 2018. But even with the tremendous revenue growth, it won't help enough to make Snap a profitable company. Analysts currently see Snap losing $0.48 per share in 2019 and losing $0.15 per share in 2020.
It would seem option traders have plenty of reason to bet on Snap's price continuing to fall, and if the company continues to disappoint on its quarterly results, the traders may prove to be right.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.