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Trade Alert: How I’m trading Snapchat

Cody Willard

Cody Willard

— 3 min read

I’ve got a surprise trade for you and one that’s a reminder that we should be flexible and opportunistic with our money. We’ve been patient and that’s paid dividends. And as I’ve been saying for the last few weeks, I’ve had my eyes wide open looking for a new sweet pitch to swing at. Here’s the scoop.

Spoiler alert:

I’m buying some call options that expire in a few months on SNAP.

The Set up:

Snapchat’s adding millions of new users and the evidence points to Wall Street’s near-term growth estimates being too low, perhaps much too low. Every teen and 20-something is pretty much already on Snapchat and is spending more time on Snapchat than they were last week which was more than they were spending on it last month. And I’ve personally seen dozens of my friends who are older than 20-something joining Snapchat this year. When I asked Cathy Jones who runs customer service for Trading With Cody, for example, and she’ll tell you she’s on Snapchat now because “it’s the only way to talk to my nieces…”

Wall Street doesn’t have any idea just strong the user growth on Snapchat is right now. And every article about Snapchat’s user growth will mention that Snapchat’s user growth was just single digits in last quarter before the IPO. Doing research on this set-up for the last few days, I’ve been once again amazed at the laziness/groupthink of media reports:

And last week, the same laziness/groupthink was reported in another round of reports:

And on the Wall Street side, the analysts seem to all have used that same slow user growth quarter from last year to base their estimates for all of 2017. The company said in its IPO prospectus that it does not plan to offer financial guidance for the quarters ahead, so without handholding from the company, the Wall Street analysts have nothing but company filings and each other to rely on.

Snapchat reported in their IPO filings that they averaged 161 million daily active users in December 2016 which was up from 122 million in Q1 2016. When Snapchat reports Q1 2017 earnings as a public company for the first time on May 10, analysts expect Snapchat will have added somewhere between 7 and 9 million new users in the first quarter of 2017. So analysts are expect 5-6% sequential growth and 6-7% year-over-year growth for the next quarter. Look at that chart again and you can see that Snapchat has had several quarters in the last couple years when they added more than 10 million users per quarter.

Meanwhile, with a market cap of more than $20 billion, Snapchat’s long-term investors are clearly expecting much more than single digit growth in years ahead. I’m still not necessarily convinced of Snapchat’s long-term model and the ability to monetize it to justify a $20 billion market cap over the next few years.

But I don’t think that matters right now. What matters is that Snapchat if is indeed adding millions of more new daily active than anybody has modeled out for 2017, there’s like.

The trade:

Amazingly, given the hype around Snapchat’s IPO and the probable volatility of this stock over the next few months, prices for the options aren’t outrageous. I am buying some $SNAP July call options with a $20 strike price for just over $2 and the July call options with a $21 strike for about $1.70. I am also going out to October on the SNAP call options and am buying some $23 strike price options for about $1.80 or so each.

The potential:

I could see Snapchat running to $30 before the end of the summer if the company adds 15 million users and it could run to the mid $20s if it adds 10 million users.

Clearly, this is a high-risk, high-potential reward trade here. If the stock stalls or drops from here, we’ll lose the entire amount of capital we threw at this. We also have another three weeks before the company reports, and there can be a lot of volatility before then. So I’m throwing a tiny bit of money at these Snap call options for now and will likely do another tranche at some point before that May 10 report.

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