9 Reasons To Bet Against Snap Stock With Put Options

Written by Dana Sanchez
4 of 10

Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending shares down more than 20 percent in after-hours trading.

When it debuted on the New York Stock Exchange on March 2, 2017, Snap, formerly Snapchat, was the initial public offering of the season. Priced at a higher-than-expected $17 per share, Snap shares opened at $24, going as high as $29.44 on Day 2 before falling more than 12 percent on Day 3 of trading to finish below their NYSE opening price.

“The honeymoon for this Wall Street newcomer was brutally brief,” Bernie Schaeffer reported for Schaeffers Research. “Since then, the stock has been unable to retake the $24 level…By the time Snap options became available to trade on March 10, the stock’s post-IPO ‘blaze of glory’ had already long since transformed into something more closely resembling a smoldering pile of rubble.”

A camera company, Snap’s flagship product, Snapchat, is an application that helps people to communicate through short videos and images known as a Snap. The company offers three ways for people to make Snaps: the Snapchat application, Publishers Tools that help its partners to create Publisher Stories, and Spectacles, its sunglasses that make Snaps.

Snap was the target of some heavy options trading activity on Friday April 14. Stock investors bought 5,071 put options on the company. This is a 2,004 percent increase compared to the average volume of 241 put options, Scott Moore reported for The Cerbat Gem.

Here are 10 reasons to bet against Snap’s stock with put options

Wall Street bronze bull statue. Photo: Bigstock

Wall Street analysts have come out against the stock

Less than three weeks after Snap went public, at least five Wall Street analysts had the stock rated as “sell,” with another two calling it a “hold,” Jonathan Garber reported for Business Insider. Traders loaded up on short bets against Snapchat, with short interest in the stock growing to more than 30 million shares — more than 15 percent of the shares available for trading, according to Data from Wall Street analytics firm S3 Partners.

Four things were limiting Snapchat’s upside, Anthony DiClemente of Nomura Instinet said, according to Business Insider:

1. Already slowing growth in daily active users (DAUs).
2. Slowing monetization (ARPU) growth.
3. Fierce competition from larger rivals such as Facebook, Instagram, and WhatsApp.
4. Rich valuation relative to current and future growth.

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Common shareholders don’t have voting rights

The most obvious reason not to buy Snap stock is that you can’t. Unless you know a Snap founder or are “friend or family” or an institutional investor, it’s extremely difficult to cash in on Snap’s IPO, Ann Skeet wrote for Market Watch before the IPO happened. The fact that common shareholders don’t have voting rights is a reason to be downbeat on the stock, wrote Business Insider’s Jonathan Garber. The company is making one of the six biggest set-asides ever for a U.S. listing, and uniquely cuts out both employees and customers, the Wall Street Journal reported.

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Companies with a controlling shareholder tend to underperform

Companies with a controlling shareholder tend to underperform those that don’t, Ann Skeet wrote for Market Watch:

Such firms are also more likely to do transactions with interested parties, creating greater potential for conflicts of interest to arise. Companies go public to raise capital. They do so by adding owners and spreading the risk. Rights typically convey with those risks. Investors should be wary of a company that wants to share the risk, but not the returns or owner’s rights, with shareholders.

Evan Spiegel Youtube/Snapchat/Business Insider

Snap’s CEO is on a misogyny watch list

CEO Evan Spiegel, 26, has apologized for emails he sent as a Stanford University undergraduate that detailed misogynistic behavior, including urinating on a woman after she passed out following sex, and harassing women he regarded as overweight, Ann Skeet wrote for Market Watch. The emails were sent in 2009 and 2010, and released to the media in May 2014.

“I’m obviously mortified and embarrassed that my idiotic emails during my fraternity days were made public. I have no excuse. I’m sorry I wrote them at the time and I was a jerk to have written them. They in no way reflect who I am today or my views towards women.”

“Deleting should be the default,” Spiegel has been quoted as saying. No wonder.

“This is the person who will have considerable and unusual control over Snap after its IPO, unchecked by traditional governance measures,” wrote Skeet, who is director of leadership ethics at the Markkula Center for Applied Ethics at Santa Clara University.

The market is moving towards impact investing, ethical consumption choices by millennials, and emphasis on ESG (environment, sustainability and governance) measures in the financial world, Skeet wrote. “The paradigms of utilitarianism, rights, justice and virtues — different lens to consider ethics — all find Snap and its leaders falling short.”

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Snap stock fell 20%-plus after Q1 earnings statement

When Facebook, Yelp, Twitter and LinkedIn reported their first quarterly results as public companies, the stocks fell by an average 14.1 percent the next day, according to Jim Strugger, derivatives strategist at MKM Partners, CNBC reported.

Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending shares down more than 20 percent in after-hours trading.

Snap’s March 2 IPO was the biggest tech offering since Alibaba, but IPOs are expensive. Snap spent $2 billion on stock-based compensation expenses. CEO Evan Spiegel got a $750 million bonus for taking Snap public. Net losses for the quarter were $2.2 billion, CNBC reported.

Snap’s revenue rose 286 percent year over year in the first quarter but it’s adding users slower than analysts expected. Daily active users rose 36 percent from a year ago, and average revenue per user grew 181 percent.

Snap added 8 million new daily users in Q1 2017 compared with 15 million in Q1 2016, Recode reported. Spiegel blamed the slowdown on a technical issue with Android users in Q4.

Analysts expect Snap to post a per-share loss through the end of 2018, according to a Thomson Reuters survey.

Photo: blog.firsthand.co

Competition from Facebook and Google

Since its IPO, Snap has had trouble convincing Wall Street it can make money with advertising as Facebook and Google dominate the market, according to CNBC. Snap CEO Evan Spiegel said that automation will help the company make more money for advertisers.

Facebook has pushed hard into Snap’s turf. Overall, Facebook has 1.28 billion daily active users, nearly eight times as many as Snapchat. WhatsApp Status has more than 175 million daily active users Instagram Stories has 200 million daily active users, CEO Mark Zuckerberg told analysts.

This week Snap CEO Evan Spiegel talked about what he thinks of Facebook copying all Snapchat’s best features. Recode reported:

“If you want to be a creative company, you gotta get comfortable with, and basically enjoy the fact that people are going to copy your products if you make great stuff. We’ve seen this happen a lot in technology. When Google came along, everyone really felt like they needed a search strategy. When Facebook came along everyone felt they needed a social strategy. And now with Snap, with our company, we believe that everyone is going to develop a camera strategy because I think we really help people understand how valuable the camera is. It’s really the center of everything that we do. At the end of the day, just because Yahoo, for example, has a search box, it doesn’t mean they’re Google.”

With Discover, media companies can publish original stories that disappear after 24 hours. Bigstock

Some see Snap’s Discover platform holding ‘little short-term financial interest’

Some publishers are earning far less money than they might have expected from placing their content on third-party distribution platforms owned by companies including Facebook, Google, and Snapchat, Business Insider reported.

Just as some publishers are starting to scale back on using Facebook’s Instant Articles over lack of tangible ruturn on investment, they’ve done the same with Snapchat, according to a January, 2017, Clickz report:

Snapchat, which has courted publishers with its Discover platform, is seen as “hold(ing) little to no short-term financial interest” according to a Digital Content Next report. Some Discover publishers employ staff dedicated exclusively to creating content for Discover.

With Discover, media companies can publish original stories that disappear after 24 hours, like almost everything on Snapchat. Mashable was one of the publishers that sank time and money into making daily videos and stories for Discover to appeal to Snapchat’s young audience. Mashable makes money off Discover by selling ads, and considers Discover an important source of revenue, New York Times reported on May 7.

The New York Times launched on Snapchat Discover on April 24 — “a big endorsement for its product at a time when social networking giant Facebook is on a quest to crush the company’s growth by releasing copycat features,” Kerry Flynn reported for Mashable:

“As we worked with (Snapchat), we wanted to make sure this is something that works in the longterm,” said Kinsey Wilson, editor for strategy and innovation at The New York Times.

Image: tecmundo.com

Snap has not released a diversity report

Tech companies including Apple, Google, Twitter, Facebook and several others have released diversity reports. Snap has not. “That’s because we believe diversity is about more than numbers,” Snap said, according to Telecrunch. Snap included in its IPO filing “a brief tidbit on diversity.”

It said it invests “in the institutions that bring us amazing diverse talent every year.” At the end of 2016, Snap employed 1,859 people, but it did not talk about demographics.

Snap said it is focused on developing a team of people with diverse backgrounds and creating an inclusive culture for them, “where everyone comes to work knowing that they have a seat at the table and will always be supported both personally and professionally.”

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Analysts, sell ratings, and the temptation to blame puppy filters

Ahead of Snap’s first quarter results, several analysts said they were optimistic that Snap would post strong results, despite failing to be profitable so far. Of the 32 analysts who cover the stock, 17 had hold ratings, nine had buy ratings and six had the equivalent of a sell rating, according to FactSet, The Street reported.

As the first quarter results were released, analysts debated whether Snap is simply a young business that needs more time to grow up, or whether it has fundamental problems with its business model, such as a lack of interest by older people in “puppy filters,” Barrons reported on May 11.

Craig Moffett with Moffett-Nathanson reiterated a Sell rating, and cut his price target from $15 to $11.

“This rapid deceleration confirms our view that Snap is highly penetrated amongst its core target demos and will hit a ceiling on DAU growth sooner than the stock is pricing in … Like Twitter, the company has absolutely no valuation support, as we have to use and adjusted Ebitda number to even get to a metric that makes some sense.”

Victor Anthony, Aegis Capital Corp reiterated a Hold rating.

“We would characterize Snap’s first quarter out of the gate as a miss on revenues and essentially in-line user growth. As such, we view the sell-off as warranted. Our concerns on the business and the stock has not changed. We remain concerned with competition from Instagram for both users and advertising dollars – a key risk factor for the business and the stock. The launch of self-serve ads, expanded Sponsored Geofilters through the Ads API, and the expansion of the salesforce should aid ad revenue growth in the future. For now, we remain cautious of Snap’s ability to grow its user base and advertising revenue at a rate significant enough to justify the stock’s valuation.”

Sell-side analysts most often assign companies “buy” ratings and almost never tell investors to “sell,” David Trainer wrote in a May 9 Value Walk report. Of 12,122 ratings for all stocks in the broad market index, less than 7 percent were labeled sells, according to an analysis from Bespoke Investment Group:

This phenomenon is not new to regular market followers, and it was on full display surrounding the IPO of Snapchat (SNAP). Research analysts are in a tough spot when it comes to ratings on IPOs their firm’s investment banking department has underwritten and sales/trading teams have distributed. They don’t want to risk angering clients that may have bought the IPO through the analyst’s firm (or) offending the bankers (who typically run the firm) that worked hard to win the IPO deal.

Eleven of the 12 analysts who initiated coverage prior to the IPO rated Snap “hold” or “sell.” As soon as the publishing window for underwriters was open, 13 underwriters initiated coverage on March 27, 2017. Nine of the banks issued “buy” ratings, four issued “hold” ratings and none issued “sell” ratings.