Oh Snap😲

We're initiating a new position.

On Monday at 10:00 a.m. central time, we are initiating a new position in Snap.

Long Snap ($SNAP)

Two observations:

  • This is the first weekly close above $20 since Snap’s IPO in 2017. The previous two times failed (see blue arrows).

  • In our experience, the best trades work immediately (positive gains within two weeks of initiating the position). If this trade works, we expect to see a test of ~$30 within a year.

How we’re executing:

  • We’re initiating a position at the market on Monday at 10:00 a.m. central.

  • We’ll exit with a weekly close under $15.

  • We usually take profits at our first target (see our rules for taking profits), but we’re going to let this trade run for at least a year. Why? We refer to this type of trade as a “breakout.” The best breakouts produce monster gains in a short period of time. And putting a price target could limit our ability to realize the trade’s full potential.

Breakouts have zero or minimum overhead supply (see examples below). We also refer to no overhead supply as “air.”

When Lululemon ($LULU) broke out in March 2018, there was no overhead supply. And the stock had room to move aggressively to the upside, which it did. It gained ~260% in two years.

In contrast

Look at Exxon ($XOM). See the overhead supply (blue curve) buyers will have to overcome? Not that it can’t be done, but it’s a tough ask.

The better trades are the Lululemon types. Which is what we think Snap is. We’re not expecting the same percentage gain as Lululemon, but the potential for an aggressive move to the upside is there.

We are taking this trade strictly based on price action, but there are a few things that might be going on with the underlying business:

  • Their financials are getting less bad…

    • Their TTM operating income is ($973) compared to ($1,160) for the same quarter a year ago.

    • Their margins (gross, operating, & net) and free cash flow are all trending in the right direction.

  • Maybe advertisers are looking for alternatives to Facebook and Twitter? Both platforms are currently taking a lot of heat.

  • Snapchat’s ‘dynamic ads’ product for e-commerce retailers rolls out worldwide. (TechCrunch)

    • My thoughts: This product will put them in the game with Facebook’s suite of advertising tools. Remember, Snap’s customers, the people who pay the bills, are advertisers. And anything they can do to help them spend money efficiently on their platform, the better.

It’s hard to believe, but Snap is the best performing social media stock YTD (+24%).

Let’s hope that streak continues😉

If you have any thoughts on Snap, drop them in the comment section below.

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Nothing in this article is investment advice. It’s for informational purposes only. Don’t be lazy; do your own research.