Snap Inc.’s (SNAP) stock has been on a bull run in 2019, with shares more than doubling as the S&P 500 has risen by more than 24%. Now some traders are betting the stock’s big move higher carries into 2020. Additionally, the stock is nearing a breakout that could result in the shares surging by 7% or more.
The equity has been volatile since reporting third quarter results at the end of October. The shares initially fell sharply following the results, only to rebound in the days after. But through all that volatility, the stock has traded sideways over the past month.
Snap vs. S&P 500
Betting On A Sharp Rise
On November 18, the number of open contracts for the January 17 $15 calls rose by almost 8,000. It increased the total number of open contracts to around 52,000. The calls trade for roughly $0.90, and for a buyer to earn a profit the stock would need to rise to $15.90 to break even. It would amount to a gain of about 9% in the stock from its current price of approximately $14.65 on November 18.
The open interest of the January 17, $15 calls
Some traders appear to be betting the stock rises to an even higher price by the middle of April. The open interest for the April $20 calls rose by over 11,000 contracts on November 18, to a total of almost 21,000. These calls trade for just $0.08 per contract and appear to be a risky bet, considering the stock would need to rise by more than 37%, to over $20.10 to break even.
Shares May Be Breaking Out
The overall bullish betting is supported by a technical chart that shows a stock that is on the cusp of a big break out. The equity is currently trading around resistance at $14.50, and if the shares can stay above that price, then it may go on to rise to roughly $15.60. Should it rise, it would take the stock back to its next significant level of resistance. The stock had climbed to that resistance level at $15.60 during the beginning of November following the company’s quarterly results but failed to advance any further.
SNAP
However, the relative strength index has been trending lower, which would indicate that bullish momentum has been leaving the equity. But, if the RSI should rise above that downtrend, it could signal a change in trend, and potentially a shift in momentum, a positive for the stock.
Improving Outlook
One reason why investors may be growing more optimistic about Snap is that analysts’ have been boosting their earnings estimates. Analysts now see the company losing $0.18 per share in 2019, which is higher than prior estimates for a loss of $0.30 at the end of July. Meanwhile, 2020 views have increased from a loss of $0.11 to a profit of $0.01, while 2021 estimates have climbed from earnings of $0.10 to $0.23 over the same period.
Snap earnings estimates
The better outlook could undoubtedly be one reason why the stock is rising over the near-term. But for the stock to push higher, those earnings trends will need to continue to improve, because the stock is expensive, with a PE ratio of over 60 using 2021 earnings estimates. It means that any slip-up by the company could result in a devastating stock decline.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.
