Shares of Snap Inc. (SNAP) have had a fantastic run in 2019, with the stock more than doubling. But with earnings for the third quarter due out on October 22 at the end of the trading day, the pressure will be on the company to deliver. It seems that some options traders are betting the stock’s hot run will continue.
Despite the bullish view, the options market is also suggesting that this will be anything but a lay-up quarter for Snap and is expecting massive levels of volatility following the results.
Based on the consensus estimates, analysts are forecasting the company to have lost $0.05 per share in the third quarter, which is better than last year’s loss of $0.12 per share. Meanwhile, revenue is expected to have grown at a blistering 46.3% versus last year to $435.54 million. The stock’s strong performance has been driven by increasing subscriber growth and improving revenue per user.
Massive Volatility May Lie Ahead
The options for expiration on October 25 are pricing in a massive amount of volatility for the stock following the results. As of October 17, the long straddle options strategy, which consists of buying a put and a call at the same strike price for the same expiration date, suggests that the stock rises or falls by as much as 14.8% from the $14 strike price. That would place the stock in a trading range of $11.93 to $16.07.
Bullish Betting Rises
However, the number of open calls at the $14 strike price outweighs the number of open puts by almost 3 to 1, with roughly 6,500 open call contracts to around 2,500 open put contracts. More interesting, is that the number of open calls has been steadily rising over the past month. It would suggest that more traders are betting that Snap rises following the results than falls. For a buyer of the $14 calls to earn a profit, the stock would need to rise to roughly $14.95 or higher, a gain of more than 8%.
Strong Subscriber Growth
Some investors may be betting that Snap once again delivers strong daily active user growth. In the second quarter the number of users jumped to its highest level ever in the second quarter to 203 million, a gain of 8% from the second quarter the year before, and nearly 7% sequentially.
What may be even more impressive is that most of the subscriber growth in the second quarter came from the rest of the world, outside of the US and Europe. The rest of the world saw year-over-year growth of 19%, rising to 56 million last quarter, and up nearly 14% sequentially.
Revenue Per User Trending Higher
The average revenue per user, also known as ARPU, has been trending higher in recent quarters as well. The second quarter saw ARPU reach $1.91, up over 36% from a year ago. ARPU has a cyclical nature to it, generally peaking in the fourth quarter and troughing in the first quarter, followed by improving second and third quarters. Investors will likely want to see that trend continue when Snap reports its third quarter results.
Improving users and revenue trends are two reasons why Snap’s stock has likely surged in 2019. But the company will need to continue to deliver, or else the wave of optimism may fade, and take the stock lower along with it.
Michael Kramer is a financial writer and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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