There’s no way around it. The second quarter of 2022 earnings report for social media platform Snap (SNAP) was downright awful. Disappointing analysts from multiple angles, the company’s underperformance comes at a time when recession fears are rising amid devastating inflation. Nevertheless, SNAP stock seems to have found discount bin divers, suggesting a protracted battle may play out in the equities market.
First, let’s review the numbers. Per the upcoming themes to watch for the week beginning July 24, I mentioned that “analysts anticipated earnings per share to come in at a loss of 1 cent while forecasting $1.14 billion in revenue. Instead, Snap delivered a loss of 2 cents and $1.11 billion in sales.” To be fair, global daily active users (DAUs) hit 347 million versus an expected 344.2 million but that was about the only positive.
Alarmingly, Snap’s management team stated that it was not providing guidance for the third quarter because “forward-looking visibility remains incredibly challenging.” It did reveal that revenue so far in the period is “approximately flat” from the year-ago comparison, implying significant roadblocks ahead. Keep in mind that the latest Q2 miss represents failure to hit a reduced guidance, which has shaken confidence in SNAP stock.
Not surprisingly, a day after the earnings report, the underlying security closed down 39% against the prior day’s session. On a year-to-date basis, shares are down nearly 79%. Yet SNAP stock suddenly appeared on the radar for unusual options activity.
Bulls Bet Big on SNAP Stock
Once the closing bell rang out for the Friday, July 22 session, Snap enjoyed the most unusual of trading activities against normal patterns. Specifically, bullish investors piled into the $11 calls with an expiration date of July 29, 2022. Volume reached 54,368 contracts against an open interest reading of 190.
Moreover, the bid-ask spread as represented by the midpoint price (26 cents) came out to 3.84%, a narrow spread relative to other transactions for the day. Typically, narrower spreads indicate higher liquidity as more bulls and bears wish to participate in the trade. Also, this condition suggests market makers are more confident in facilitating the transaction while collecting a profit for their services.
Given that these options will expire worthless by this coming Friday, this may have played into the spread’s formulation. With a Friday closing price of $9.96, SNAP stock must rise more than 10.4% to be in the money. Such an outcome is possible though it’s also risky for the call buyer considering the poor fundamentals.
Also, before prospective buyers take a shot with SNAP stock, they should consider the put-call open interest ratio of 0.81. Usually, put-call ratios above 0.7 imply that equity traders are buying more puts than calls. Therefore, the sentiment for the social media firm is still negative despite the recent surge in contrarian bullishness.
Economic Pressures Weighing on Social Media
Fundamentally, the narrative for SNAP stock may very well be that COVID-19 giveth and taketh away. During much of the global health crisis, shares of the youth-centric social network flourished as digital connectivity platforms was one of the few ways people could stay connected. However, as fears of the pandemic faded away, consumers opted for real experiences.
Indeed, the woes of big-box retailers like Walmart (WMT) and Target (TGT) are similar to the challenges facing social media companies today. Essentially, retailers anticipated demand that simply didn’t materialize as consumers gravitated toward experience-based events (like travel), leaving them sitting on inventory that they don’t know what to do with.
With social media, it’s an analogous challenge. Consumers are focusing their financial resources on making up for long-delayed vacations, imposing challenges on some of Snap’s new initiatives. However, with rising inflation hurting even the robust post-COVID air travel sector, it’s not unreasonable to assume more headwinds lie in store for SNAP stock.
As if those problems weren’t big enough, a platform policy change by Apple (AAPL) has made it more difficult for Snap to collect data on its users. Long story short, Snap was not able to provide prior magnitudes of advertising precision, thus disincentivizing marketers to spend on the social network.
Here, the headwind is structural, meaning that it could be a long way before SNAP stock climbs out of the malaise.
A Naked Bet on the Technicals
As the framework currently stands, the bullishness in the options market for SNAP stock appears largely based on technical speculation that a dead-cat bounce will materialize. Fundamentally, however, Snap faces significant infrastructural and consumer-level challenges that will likely not be easily resolved. Therefore, prospective investors must approach with extreme caution.
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